Health Savings Accounts, commonly known as HSAs, are one of the best kept secrets in employee benefits. If you are enrolled in a high deductible health plan (HDHP), you are likely eligible to enroll in an HSA. Contributing to an HSA enables you to maximize your finances, and each year you go without, you’re leaving potentially thousands of dollars on the table.
One of the most well-known reasons for contributing to an HSA is that this pre-tax savings account can help you pay for out-of-pocket (OOP) medical expenses that arise throughout the year. But, that’s not the only reason you should get an HSA.
No matter who you are, an HSA can be valuable - for different reasons. Depending on what stage of your life and professional career you are in, your mindset regarding healthcare costs and overall savings will vary dramatically. In this post, we’ll take a quick look at how you can use an HSA to put yourself in the best financial position, now and in the future.
Lifestage 1: Young Single Professionals, just beginning their careers (20-30)
For single people in their 20s and 30s, enrolling in an HSA-eligible health plan and pairing that with a consistent HSA savings strategy is a no brainer. While your income (and tax benefits from HSA contributions) may be lower, you have two things on your side that make an HSA especially valuable: time and health. When you are younger, you are likely to spend far less on health care than you will when you get older. This means that you will actually be able to save most of your HSA savings, rather than using them to cover OOP costs.
When you put these HSA savings to work in an investment account early in your career, you give your investments 30 to 40 years to grow, taking full advantage of compound interest to help you prepare for retirement.
Here’s a simple example to really drive the point home:
Let’s say that you open up an HSA when you are 25 and you commit to investing $50 each month in an HSA that you won’t touch until you retire at age 65. We’ll also assume that you live in Pennsylvania and earn around $50,000 a year, so your Federal tax rate is 22% and your state income tax rate is a little over 3%. Right off the bat, these HSA contributions are going to save you money on taxes. That $50 contribution will only actually cost you $34 a month after you account for savings on Federal, state, and payroll taxes - about the cost of your Netflix and Spotify subscriptions. If your investments earn an average return of 7% annually, you’ll end up with nearly $128,766 in savings by the time you retire, and more than 80% of that amount will have come from compound interest.
See what we mean when we say it’s a no brainer?
Lifestage 2: Mid-Level Professionals, with or without a spouse and children (31-50)
As you get older, your income is hopefully increasing, but you may find that your financial obligations are increasing too, making it harder to prioritize saving in an HSA. Perhaps you’re trying to save up for a down payment on a house, or, if you have (or are planning on having) children, you may need to free up cash flow to pay for childcare or school. On top of that, as you get older and have to worry about paying for the health care of dependents, you may start thinking that an HSA-eligible plan is no longer a good fit.
In most cases, this thinking is wrong.
When you are trying to find room in your budget for big ticket items like a house, car or daycare, it becomes more important than ever to make sure you spend your money wisely, yet many people in this phase of their career forgo valuable savings opportunities because they buy more insurance than they need. The thinking is that they can’t afford the high deductibles that come with an HSA-eligible plan. This line of reasoning ignores how much more you have to pay in premiums to avoid high deductibles and, in most cases, it overestimates how likely you are to actually experience high OOP costs.
At Picwell, we often find that once you account for the extra premiums that you would pay, it becomes very unlikely that you would ever end up saving money in the more comprehensive option. In fact, across the hundreds of thousands of families who have used Picwell to choose their health insurance plans, we find that an HSA eligible plan is the best option more than 90% of the time. In many cases, families can save thousands of dollars by picking an HSA-eligible plan over a lower deductible option.
If you are worried about how to pay for high deductibles, you could put some of these savings into an HSA to make sure you have enough cash on hand to cover a surprise medical bill, and then you can use the rest of your savings to save up for that down payment.
If you follow this strategy, in most cases, you’ll end up with extra, unused funds in your HSA at the end of the year. If this happens, you can use these funds to either improve your family's financial security against unexpected medical bills next year or to continue building up a retirement nest egg.
Whichever way you slice it, investing in an HSA always makes financial sense.
Lifestage 3: Senior Professionals, retirement ready (51+)
As you get older, retirement planning starts to take center stage, and planning for health care costs needs to be a major part of your retirement strategy. Hopefully, you’ve been saving consistently by the time you get to this phase of your career but if you haven’t, catching up should be your top financial priority.
According to our estimates at Picwell, a couple retiring today at age 65 will spend an average of $312,000 if they live to the age of 85 (which is about the average life expectancy) and $426,000 if they live to the age of 90. However, with historical health care inflation rates hovering around 5% per year, this number could be substantially higher, depending on when you plan on retiring.
We know what you’re thinking... “So what does this all mean?”
This means that regardless of how healthy you are, a big chunk of your retirement spending will inevitably go towards health care. This is where HSAs can be an especially valuable tool.
Unlike a 401(k), when you make an HSA withdrawal to pay for medical care, you don’t have to pay any taxes. In fact, even if you use your HSA for a non-qualified expense, like financing a vacation with the grandkids, you may still be better off putting your money in an HSA instead of a 401(k).
When you contribute to an employer-sponsored HSA through payroll deductions, unlike a 401(k), you don’t have to pay any Social Security or Medicare taxes. On top of that, your HSA is not subject to the same minimum distribution requirements that apply to your 401(k), so putting more money in an HSA gives you more flexibility.
Here’s the bottom line - If you are late in your career and really focusing on saving for retirement, you should be putting as much money as possible into an HSA. If you can afford to contribute the annual maximum, do it. In fact, once you’ve contributed enough to your 401(k) or IRA to maximize any employer matching, your optimal strategy will be to not contribute a single additional penny to your 401(k) until you have maxed out your annual HSA contributions. By doing so, you’re taking advantage of all the tax advantages HSAs have to offer. Ultimately, this will help you prepare for the health care costs that you will surely face in retirement. If you end up saving too much, no worries, you are no worse off than if you did put that money in a 401(k). It’s truly a win-win.
If this all seems difficult to navigate on your own, that’s because it is. Luckily, we have a solution. Benefits decision support tools are designed to help make these types of decisions easier. When you use a solution like Picwell DX, you can be confident you are putting yourself in the best financial position possible.
Stop leaving money on the table, and start making the right decisions with Picwell DX.
Learn more about Picwell DX.