Why Health Savings Accounts Are Such a Great Deal

August 10, 2016

Health savings accounts have been around for several years now, but we still find that there are plenty of people out there who don’t understand how they work or why they can be such a great deal. We are lucky enough to have access to them at Financial Finesse and my colleagues with great health and relatively little expenses simply love the plan. Here’s why: it’s a high-deductible plan connected to a health savings account (HSA), a plan type that is becoming more and more common as traditional insurance premiums continue increasing.

In our case, our company pays lower premiums because we have to spend $3,500 each year before the insurance even begins to cover us. That doesn’t sound like a great deal for us employees though, huh? That’s what a lot of people originally think too. But the other side is that our employer uses the savings to put $2,500 each year into a health savings account for each of us that we can then use to pay that $3,500 deductible. As a result, we would only have to pay an additional $1,000 to reach the deductible, and that’s only after our healthcare costs exceed $2,500.

The best part is that we pay no taxes on this money and unlike FSAs, we get to keep whatever we don’t spend in our account. That doesn’t mean you can take the money and splurge it on a nice vacation (at least not without paying taxes plus a 20% penalty on it). But it does mean you can invest that money in your HSA tax-deferred until age 65, when you can then spend it on retirement without penalty, use it tax-free for medical expenses (which Fidelity estimates will be about $245,000 over the remaining lifetime of a 65-yr old couple without retiree health insurance), or just let it continue to grow tax-deferred.

The interesting thing is that it changes your whole view on health spending. Normally, you probably just go to the doctor when you feel sick and don’t think much about costs since someone else (the insurance company directly and your employer indirectly through higher premiums) is paying. Think about how you’d spend if other areas of your life worked that way (as someone who loves to eat out, I wish my company provided us food insurance). Instead, when the dentist asks when the last time you had your x-rays done, you’re more likely make sure you know the answer before paying for x-rays you don’t need.

Annual wellness visits are free of charge by law. If you rarely get sick, you may not have to spend any money at all while still keeping up on your vital visits (and banking those employer contributions). You can also use your HSA for medical expenses as well as on your spouse and dependents even if they’re not covered on your health insurance plan.

Another thing I love about HSAs is that an individual at my company can also add another $850 to it each year since the limit is $3,350 per year for a single person. If you have the deposits deducted from your paycheck, you also don’t have to pay the 7.5% payroll tax on it. Not even 401(k) contributions let you do that. When you consider that HSAs offer you both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your 401(k) (after you’ve maxed the match, obviously) or IRA.

So what’s not to love? Apparently not much. With two caveats: make sure you have at least enough cash on hand to pay each year’s out-of-pocket maximum and if you have latent health conditions like I do, consider switching to a lower-deductible plan when your healthcare needs are projected to grow.