This discussion is specific to U.S. tax/retirement/health care law.
High-deductible health plans and HSAs are not new, but they are mentioned much less than IRAs and 401(k)s, so I thought some discussion of the benefits would be worthwhile. My opinion is that these are very good after you have funded your IRA/401(k), and are often overlooked.
OK if you are employed then you know that its open enrollment time in the U.S., where you pick your health insurance coverage.
Here is a tip - go with a high deductible health insurance plan, and contribute the difference in premiums to a HSA - health savings account.
Here is why my employer offers for 2019. The subsidy is modest - if you work for a larger employer you might have much better rates.
For family coverage under a traditional plan (PPO), I pay almost $400 every paycheck (2 weeks). There is an individual $1500 deductible, and a 10% co payment after that.
For family coverage under an HDHP, my cost is about $250. There is a $2750 individual deductible and a $4000 family deductible, and after that no-copayment.
For me, the difference over the course of a year is $3900!
So one benefit of a high deductible plan is lower premiums.
The other benefit is that you are eligible for a health savings account. A health savings account is like an IRA. You defer money from your paycheck into this account. The limits for this are $3500 individual and $7000 family in 2019. Personally I plan to defer the full $7,000. You may only have a HSA if you have a high-deductible health plan.
Why would you want to contribute money to a HSA? A couple of reasons.
First, your deferrals are tax free. In other words, the $7000 I defer into the HSA is not taxed presently. Its not subject to income taxes or payroll taxes. That is a huge benefit.
Second, as long as I spend it on qualified medical benefits (for example, the cost of any care that contributes to my deductible, eyeglasses, testosterone treatments, etc.) the money is never taxed. It comes out of the HSA to the doctor without reduction for income or payroll taxes. Similarly, when I pay my income taxes at the end of year, my taxable income is $7,000 less.
Third, a lot of employers will incent you for choosing the HDHP because its cheaper for them. Mine is going to contribute $1500 to my HSA this year, so really I'm just deferring $5500. (The annual limits apply whether the contribution is made by the employer or employee; this is different from how the IRA match rules work).
Fourth, to the extent you don't spend the money in the HSA, you don't lose it. Better yet, my HSA allows me to invest it like an IRA once I have a $2000 balance. So this money will compound over time, tax free, just like an IRA.
Finally, this is effectively a way around the limits on IRA contributions. In your old age, your medical costs will be a big chunk of your expenses. The HSA provides tax free funds to pay for these, which means you don't have to spend your IRA or other investments to pay for those expenses. And if you are healthy, you can spend the money on non-medical costs, although there is a catch. If you are over 65 and do this, you pay tax on the withdrawals, but that is no worse than an IRA. (And better than an IRA because it gives you the option to pay avoid tax completely by using the funds for medical expenses.) If you take the money out for non-medical uses before age 65, you not only pay income tax but also a 20% penalty. (That's similar to the IRA treatment, except the IRA penalty is only 10% and ends at age 59 1/2).
Now, I'm closer to retirement than many of you, but even if you are young a HDHP and HSA are still worth doing. The benefits are modest, but they compound over time. They are also less lucrative than the benefit of an IRA/401(k), so if you have that option fund that first.
I never gave much thought to HSAs because I don't think about medical costs that much. But the way to think of an HSA is not about medical costs, but about the money you get to keep at age 65 which has compounded tax free).
If you want to dip your toe in the water, try this. Look at the difference between a high deductible health plan and a regular plan. Lets say for you its $77 difference every 2 weeks. OK, sign up for the HDHP and take that $77 savings and contribute it to the HSA. Over the course of a year, it will add up to $2000. My HSA gives me a debit card, and I use that at the doctors office to pay my medical expenses. lets say you get contact lenses, and you have a couple of doctor visits, total $500. You will have paid the $500 with tax free dollars, and at the end of the year you have $1500 that rolls over in your HSA.
High-deductible health plans and HSAs are not new, but they are mentioned much less than IRAs and 401(k)s, so I thought some discussion of the benefits would be worthwhile. My opinion is that these are very good after you have funded your IRA/401(k), and are often overlooked.
OK if you are employed then you know that its open enrollment time in the U.S., where you pick your health insurance coverage.
Here is a tip - go with a high deductible health insurance plan, and contribute the difference in premiums to a HSA - health savings account.
Here is why my employer offers for 2019. The subsidy is modest - if you work for a larger employer you might have much better rates.
For family coverage under a traditional plan (PPO), I pay almost $400 every paycheck (2 weeks). There is an individual $1500 deductible, and a 10% co payment after that.
For family coverage under an HDHP, my cost is about $250. There is a $2750 individual deductible and a $4000 family deductible, and after that no-copayment.
For me, the difference over the course of a year is $3900!
So one benefit of a high deductible plan is lower premiums.
The other benefit is that you are eligible for a health savings account. A health savings account is like an IRA. You defer money from your paycheck into this account. The limits for this are $3500 individual and $7000 family in 2019. Personally I plan to defer the full $7,000. You may only have a HSA if you have a high-deductible health plan.
Why would you want to contribute money to a HSA? A couple of reasons.
First, your deferrals are tax free. In other words, the $7000 I defer into the HSA is not taxed presently. Its not subject to income taxes or payroll taxes. That is a huge benefit.
Second, as long as I spend it on qualified medical benefits (for example, the cost of any care that contributes to my deductible, eyeglasses, testosterone treatments, etc.) the money is never taxed. It comes out of the HSA to the doctor without reduction for income or payroll taxes. Similarly, when I pay my income taxes at the end of year, my taxable income is $7,000 less.
Third, a lot of employers will incent you for choosing the HDHP because its cheaper for them. Mine is going to contribute $1500 to my HSA this year, so really I'm just deferring $5500. (The annual limits apply whether the contribution is made by the employer or employee; this is different from how the IRA match rules work).
Fourth, to the extent you don't spend the money in the HSA, you don't lose it. Better yet, my HSA allows me to invest it like an IRA once I have a $2000 balance. So this money will compound over time, tax free, just like an IRA.
Finally, this is effectively a way around the limits on IRA contributions. In your old age, your medical costs will be a big chunk of your expenses. The HSA provides tax free funds to pay for these, which means you don't have to spend your IRA or other investments to pay for those expenses. And if you are healthy, you can spend the money on non-medical costs, although there is a catch. If you are over 65 and do this, you pay tax on the withdrawals, but that is no worse than an IRA. (And better than an IRA because it gives you the option to pay avoid tax completely by using the funds for medical expenses.) If you take the money out for non-medical uses before age 65, you not only pay income tax but also a 20% penalty. (That's similar to the IRA treatment, except the IRA penalty is only 10% and ends at age 59 1/2).
Now, I'm closer to retirement than many of you, but even if you are young a HDHP and HSA are still worth doing. The benefits are modest, but they compound over time. They are also less lucrative than the benefit of an IRA/401(k), so if you have that option fund that first.
I never gave much thought to HSAs because I don't think about medical costs that much. But the way to think of an HSA is not about medical costs, but about the money you get to keep at age 65 which has compounded tax free).
If you want to dip your toe in the water, try this. Look at the difference between a high deductible health plan and a regular plan. Lets say for you its $77 difference every 2 weeks. OK, sign up for the HDHP and take that $77 savings and contribute it to the HSA. Over the course of a year, it will add up to $2000. My HSA gives me a debit card, and I use that at the doctors office to pay my medical expenses. lets say you get contact lenses, and you have a couple of doctor visits, total $500. You will have paid the $500 with tax free dollars, and at the end of the year you have $1500 that rolls over in your HSA.