3 things to know about health savings accounts
NEW YORK — While much of the U.S. health care system is in flux since Republicans passed a new health care bill Thursday, health savings accounts — or HSAs — aren’t going away. In fact they’re likely to get bigger and more popular if the new bill ever becomes law.
The proposed changes tend to push for Americans to take more ownership over their health care and have greater accountability in paying for it.
“This bill provides more freedom to the individual, more choice and more opportunity,” House Majority Leader Kevin McCarthy told CNN’s Dana Bash.
One way lawmakers aim to do that is by increasing the amount you can contribute to your HSA each year.
The bill nearly doubles the limit to $6,550, up from the current cap of $3,400 for individuals. For those with family coverage, the contribution limit increases to $13,100, up from $6,750.
An increasing number of companies offer HSAs as part of their employee health coverage: 80% of companies with more than 5,000 employees offer HSAs, 61% of medium sized companies and 25% of small companies, according to Alegeus, which administrates health care benefit accounts.
Since health savings accounts have only been around since 2004 and they combine two industries that can be painfully confusing to consumers — health care and investing — it’s understandable you’ll have some questions.
Here are three things you need to know about HSAs:
1. An HSA is not the same as an FSA
In order to have a health savings account, you need to have a high-deductible health care plan. These plans carry a lower monthly premium and ask you to pay a certain amount out of pocket first before your insurance kicks in.
Money in an HSA can be used to pay deductibles and other qualified health care expenses (including dental, vision or other health services not covered by your insurance). Money remaining in the savings account can be invested in mutual funds, just like a 401(k).
Best of all, unlike a flexible spending account, the tax advantaged money (more on that below) is yours to grow and keep year after year, even if you leave your employer.
2. They come with triple tax benefits
The appealing thing about health savings accounts — particularly to higher income folks who can contribute the maximum amount in an HSA — is that they come with triple tax perks.
As an investment vehicle, HSA’s are more tax advantaged than most retirement accounts.
The money contributed to the HSA is tax deductible, just like contributions to an IRA. The money withdrawn to pay a qualified medical expense comes tax free. And lastly, the money in your health savings account grows without incurring taxes for the life of the account.
3. They can make a great retirement account … if you can afford it
Your health savings account is the best tax-free investment account you’ll be able to find. That’s because the money is shielded from taxes going into the account, as it grows, and when you withdraw it — as long as it’s used to pay for medical expenses.
For lucky folks who have already maxed out their 401(k) and IRA contributions, a health savings account is yet another place to stash cash in a tax-advantaged way.
Savvy HSA users could accumulate up to $360,000 after contributing for 40 years to an account with a rate of return of 2.5%, according to the Employee Benefit Research Institute. That jumps to $1.1 million with a 7.5% return and no withdrawals.
Given the proposed contribution limit increases, the returns stand to grow even more.
That could be a great way to pay for health care costs in retirement.
But growth at those rates is only possible so long as you’re not using your health savings account for, well you know, health expenses before you retire.