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 Health
Savings Accounts 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.
