If you do any reading online about early retirement, tax planning and investing, it’s difficult to avoid discussions about Health Savings Accounts (HSAs).
When I first read about these, I wrote it off quickly. There was no way I could get myself to consider a high-deductible plan, the only plans where HSAs are allowed. Fortunately, my thinking has changed during the past two years!
Search the IRS.gov website to get your own information. Don’t believe everything you read elsewhere. Talk to your tax and investment advisers, too. I asked a lot of questions. The downside is that when you ask your employer’s HR representatives questions about HSAs, be prepared for blank stares. I work for a large employer and, not surprisingly, most people choose the plan closest to an HMO type of offering. Since my selection was the least selected option, they knew less about it. They could tell me a few things about the actual medical plan, but virtually nothing (or, nothing accurate) about the HSA.
The HSA is intended to be a savings plan for future medical expenses. For 2015, a single person can contribute $3,350 annually. Be careful to keep your contributions on an annual calendar even if your employer offers benefits on a fiscal year. You might have to monitor the amount being transferred so that you don’t exceed the maximum allowed by the IRS.
I was able to designate the HSA “bank” or administrator myself. You can choose from dozens, maybe even your own bank. The terms and fees vary widely. My intention is to move the funds to an index fund once I get to the $10,000 minimum for a particular administrator. In the meantime, I selected an administrator that will only charge a $1 monthly fee only on months when the account is less than $500. For me, that was only the first month the account opened.
After reaching the $10,000 investment minimum, the money will be transferred to the investment account through a different HSA administrator.
I know what you’re thinking.
How do I then pay for medical expenses? Unless they are huge, I will budget for them as I do everything else and pay using my take home pay. Of course, all receipts are saved and mileage for medical appointments tracked in case they reach the threshold amount to be able to be deducted on taxes.
That sounds expensive, right?
What makes sense is that I get $3,350 deducted from my pay before taxes are calculated. Reduced pay means lower taxes and it lowers the adjusted gross income, which lowers overall taxes and qualifies me for other programs.
Look at the IRS documentation for how an HSA can be used. Aside from using the money any time now or saving it for medical expenses later, when you use the money for a medical reason, it is not taxed. After retirement age, you can then use the money for anything you want and the withdrawals are taxed at your current tax rate. The money is also part of your estate, so it can benefit your heirs after you are gone. Take that, FSA.