Make
Sure to Establish Your Health Savings Account
By
switching from a conventional copay health insurance plan
to a high-deductible health insurance plan (HDHP), most
people are cutting their health insurance costs by about
40% or so. This is such a big savings, that many
people neglect to take the next step and set up their
HSA. But this is a financial mistake that is costing
them money.
Unless
you pay no income tax and have zero medical expenses (including
dental, over-the-counter medications, or charges for alternative
care like chiropractic or acupuncture), you will absolutely
save money by establishing your HSA. You can find
a list of HSA Administrators we recommend at our HSA
Administrators page.
Run
All Your Medical Expenses Through Your HSA
Not
everyone feels like they have "extra" money that they
afford to set aside in their HSA, despite the tax savings
and other financial benefits. Even if that's the
case, you should still establish your HSA. Every
time you incur a medical expense, deposit at least as
much money as you spent on that medical expense.
For instance, if you went to the dentist and it cost $85,
put $85 in your HSA. If you like you can then take
it right back out.
What
this does is convert this medical expense into a tax-deductible
expense. Then when you file your taxes next year,
you can put the total amount that you ran through your
HSA on line 25 of your 1040, and deduct it from the total
income you report.
Cover
Your Deductible
Your
next step is to get enough money in your HSA to cover
your deductible. For 2008, deductibles range from
$1100 to $5600 for individuals, and $2200 to $11,200 for
families. Annual contribution limits are $2900 for
individuals, and $5800 for families. So it could
take a couple years or longer to get enough money in your
account to cover your deductible.
Once
this money is in your HSA, you will have the confidence
of knowing that you can cover most any medical expense
that comes your way, particularly if you have a health
insurance plan that pays 100% after your deductible.
As
you continue to build money in your account, you may want
to consider switching to a health insurance plan with
an even higher deductible, which will further lower your
premiums.
Minimize
the Fees You Pay
If
you will be using your HSA to pay medical expenses as
you incur them, you should keep an eye on the fees your
bank charges. Until you have enough money in your
account to cover any fees with investment returns, you
probably want to have your HSA with a bank that charges
no fees. (Several are listed on the website referenced
above).
If
you plan to access money from your HSA to pay ongoing
medical expenses, you may wish to keep a portion of your
HSA money in a savings account or short-term CD.
But to take maximum advantage of your HSA, you'll want
to eventually move some of the funds to investments that
have a higher potential return.
Investment
Options
No
other investment has the triple tax-advantage that HSAs
offer. Not only is your deposit tax deductible,
and your withdrawals to cover medical expenses tax-free,
but your investment also grows tax-deferred.
Taking
advantage of tax-deferred growth is one of the best ways
to build long-term savings. Some banks will provide a
short list of mutual funds you can invest in, while others
provide access to an online discount brokerage such as
Ameritrade where you can choose from stocks, bonds, mutual
funds, and more.
The
most aggressive strategy is to pay your medical expenses
from somewhere other than your HSA, and save the receipt.
You can then reimburse yourself at a later date.
The additional growth you get from not paying any taxes
on your investment may be enough to cover all your medical
expenses.
