Seven dollars. That was the per-day cost of a maternity room in Jersey City, New Jersey, in 1942. Sure, adjusting for inflation brings us to $110, but that’s still unheard of. Try to find a hospital room for around a hundred dollars today! The bloated cost of healthcare isn’t a new discussion on the American airwaves. Healthcare always seems to be on the front lines of any discussion of the rising costs of modern life.
And they will continue to go anywhere but down. Triple-digit medical costs will likely seem as strange to our kids as single-digit totals seem to us. It’s no wonder healthcare spending in the US rose nearly $1 trillion between 1996 and 2015 – that’s $50 billion a year, not in how much we spent, just how much the spending increased.
On this kind of rising tide, financial vehicles like the Health Savings Account are all the more important. Tax-advantaged, easily accessible and relatively stable, the HSA gives you more control and prerogative over your medical expenses. People seem to be responding – in 2019 it’s estimated that $64 billion will be in HSA accounts as compared to $1.7 billion in 2006.
Let’s look at a few health savings account tips that can help you stay afloat in the swell of healthcare expenses in the near future.
Triple Tax-Advantaged
The tax treatment on an HSA is unique among accounts. A traditional 401(k) has you paying out your taxes when you withdraw the money. A Roth 401(k)/IRA has you pay Uncle Sam before you put the money in. Each account has its own financial planning implications. But your HSA has no tax time – not when you contribute, not on growth and not on the time of withdrawal.
Qualified expenses shelter your HSA withdrawals from taxes. As a health-related account, these expenses range from acupuncture to x-rays and essentially give you an account that is entirely tax-protected. Talk with your HSA provider and advisor about what’s considered a qualified expense in your case, and work with your doctor.
User-Friendly Investing
Unlike Roth retirement accounts and some other vehicles, there are no income limits for an HSA. Middle-class 9-to-5ers and billionaires alike can all invest in an HSA and experience the same tax treatment and savings. The only qualifying factor is that you are in a high deductible health insurance plan.
There’s no limit to how much you can have in an HSA, but there are limits for contributions. For 2019, a single person can contribute up to $3,500 a year, and a family plan limit is $7,000. If you’re 55 years of age or older, you have a $1,000 yearly catch-up option.
Employers can also contribute to HSAs as a benefit to employees, but their contributions also count toward your annual limit. So if your employer contributed $1,000 to your family plan, you could only put in $6,000 of your own money.
Growing an HSA by investing is becoming more popular. For much of their short history, HSAs have been held by banks and so are difficult to actively invest, like an IRA or 401(k). But investing opportunities for HSAs are becoming more popular and some providers now offer mutual funds, ETFs, stocks and other investment opportunities to grow your money.
Rainy Day Fund Reimbursements
You can also, with a bit of choreography, use the HSA as a next-level savings tool. As long as you’ve been enrolled in the plan, you can reimburse yourself for qualified expenses you’ve paid out-of-pocket. This strategy becomes a savings tool that can help you keep protected money on hand.
For example, a family of four has had a few normal years of health expenses – $50 a month for prescriptions and a few doctor appointments. During those years they paid the doctor and pharmacy directly and choose to not reimburse themselves from their HSA.
At the start of the next year, they have a financial need come up and need liquid cash quickly. They can reimburse themselves all that money out of their HSA for those out-of-pocket expenses they’ve been paying over the last few years.
Essentially, an HSA can act as a triple tax-advantaged emergency fund.
Deductible Strategy
Similar to the rainy day fund, another helpful strategy is to keep at least your deductible on hand in your HSA. Let’s say your high deductible plan is $10,000 for the year. Build your HSA up to that point and you’ll never find yourself scrambling to cover a deductible.
In Retirement
The game changes at the magical year of 65. The government, which has been giving you tax-advantages to your HSA, now takes those away and gives you Medicare. You are no longer allowed to contribute after your 65th birthday if you are enrolled in Medicare A or B. This is an either/or situation – HSA contributions or Medicare.
All funds are still yours, of course, but your access to the money changes. You can now take distributions from your HSA for non-medical expenses. You won’t have to pay a penalty, but you will have to pay taxes on them. Your HSA at this point essentially becomes like a 401(k), and Uncle Sam puts his hand out once you hit 65. You can also continue to pay for qualified expenses tax-free, and the same rules still apply.
Your HSA becomes a protected account you can use to continually pay for medical bills that arise and to supplement your Medicare. This makes it all the more important to max out your HSA contributions before you hit 65, so you have money in the account and growing while you’re in retirement.
One final health savings account tip: you can use your HSA to pay for long-term care premiums, but the tax-free amount you can withdraw for this purpose depends on your age. If you’re 40 or younger, you can withdraw up to $420 annually for premiums, then this goes up every decade and finally maxes out at $5,270 per year after you turn 71. This is an important planning piece for the retirement years.
Here Comes the Future
We’re no longer in a $7-a-day world, not by any measure. You have to be savvy and forward-thinking about medical expenses and build them into your financial plan. The HSA offers you a flexible, user-friendly way to stay on top of expenses, and a protected source of cash for the inevitable.
Maybe not all the dire headlines about the cost of healthcare will come true, but we don’t know. The one absolute about the future: whether it’s good or bad, it’s most definitely coming. How can we as your advisor team help you prepare for the years ahead? Give us a call and let’s get working on a plan that will give you confidence and clarity going forward.