Kiplinger's Personal Finance|April 2020
High-deductible health plans have a well-deserved reputation as a way for employers to pass along some of the burden of spiraling health costs to you. They typically come with lower premiums than traditional insurance plans but require you to pay for more of your medical costs before your insurance kicks in.
Such plans have become more prevalent in recent years. Last year, 30% of people with employer-sponsored health insurance enrolled in high-deductible plans, compared with just 8% a decade earlier, according to the Kaiser Family Foundation. For some people, a high-deductible plan may be the only choice offered by their employer.
But high-deductible plans also give you access to a health savings account. And an HSA has secret powers that most people haven’t begun to tap. An HSA isn’t just a short-term, tax-friendly way to pay for current and future medical bills; it’s also a vehicle for supercharging your retirement savings.
For Marianela Collado, a certified financial planner in Weston, Fla., switching to a high-deductible plan and opening an HSA five years ago was an easy decision. Marianela, her husband, Edgar, and their three boys were healthy and rarely visited the doctor aside from annual checkups. The family began funneling cash into their HSA and covering current medical expenses out of pocket so the account could continue to grow.
Today, Marianela and Edgar, who are both in their early forties, contribute the maximum to their HSA each year, investing most of the money in a portfolio of growth-oriented stocks. “We hope to leave the account untapped for 20 to 30 years so it grows as much as possible,” Marianela says. Then, she says, they can use that money for medical expenses during retirement.
Learn the basics. A health savings account offers a tax-saving trifecta. First, contributions to an HSA can be made pretax to an employer-sponsored HSA plan—or they can be deducted (even if you don’t itemize) if you’re saving in an account on your own. Second, money in the account grows tax-deferred. And third, you can take tax-free withdrawals at any time to pay for qualified medical expenses, including deductibles, co-payments, prescription drug costs, and out-of-pocket dental and vision expenses. (If you withdraw the funds for nonqualified expenses before age 65, you’ll pay a 20% penalty, plus income tax on the amount you take out.)
To contribute to an HSA, you must be enrolled in a high-deductible health plan with an annual deductible of at least $1,400 for individual coverage or $2,800 for family coverage in 2020. The plan must also have a limit on out-of-pocket medical expenses including deductibles, co-payments and other amounts (but not premiums). In 2020, the out-of-pocket limit is $6,900 for individual coverage and $13,800 for family coverage.
If your health plan meets those requirements, you can contribute up to $3,550 to an HSA in 2020 if you have individual coverage, or up to $7,100 if you have family coverage, including any cash your employer has kicked in. If you are 55 or older in 2020, you can contribute an additional $1,000 in catchup contributions.
A couple of other important details: Unlike flexible spending accounts, which generally must be depleted by year-end (or March 15, depending on your employer), HSA funds don’t have a use-it-or-lose-it rule. That means you can build up a stash of tax-free money for major medical bills or for medical expenses much later, such as in retirement. Also, you can’t make new contributions to an HSA after Medicare coverage begins, even if you’re still working, but you can continue to use the money that’s already in the account taxfree for eligible costs that aren’t covered by insurance.
Set your strategy. Before you pledge to invest for the long term in your HSA, check out the decision tree on page 48. The best approach to saving in your HSA depends on how much cash you have available elsewhere to cover out-of-pocket medical expenses, your HSA plan’s minimum balance requirements and how long you think it will be until you need to withdraw the money from the account.
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