Healthcare is expensive, there’s no way around it. Unless you’re a financially independent multimillionaire who can afford to pay tens to hundreds of thousands of dollars without blinking an eye if you or your family’s health takes a hit, you need health insurance. Period.
Sure, if you’re a young, single 20-something you may feel invincible. You argue you’re trying to build a new business or work as a contractor or at a small firm that doesn’t offer health insurance and are thinking about going without. DO NOT DO IT. Just don’t.
Accidents happen. Unfortunate surprises pop up. An ambulance ride alone can cost $1000 – even with people with insurance! God forbid you’re diagnosed with a new chronic medical condition.
Healthcare premiums are about $3000-4000 per year for young folk – you can get your estimate here – Kaiser’s Health Insurance Marketplace Calculator. That’s a small price to pay to mitigate a possible looming financial disaster if anything happens to your health.
Yes, yes, it’s expensive. We get it. Yet, it’s definitely worth it.
ER visit? With insurance, it’s at least $100 just to walk in the door. Then the lab work, imaging studies, etc. Insurance usually will pick up 60% or more of that cost. Without insurance? ER visit for a minor problem (e.g. have a small laceration) will cost you at least $1000 out of pocket. Annual check up? Usually free or only a small co pay $40-60 per visit. Without insurance? Try at least $200-300.
Now if you’re healthy, just go for annual check-ups, does a few episodes of care make up for that $3000-4000 / year price tag for health insurance? Yes. Again, you don’t know when bad luck will strike, so going without is not a good idea. This is a prime directive.
A Health Savings Account (HSA) is a triple threat. Its contributions, earnings and withdrawals are (mostly) tax free. Money rolls over year to year (unlike the much inferior FSA – flexible spending account), the HSA is yours to keep forever- even if you quit your job or lose your health insurance, and you have flexibility in how you use the money in the account. Now getting your triple-tax advantaged enterprise operational will take a little bit of leg work, but it’s worth it. Many Citizens of Moneyland have done it before you, and so can you. Let’s see how it’s done.
How do I get an HSA?
First, to be eligible for an HSA, you must be enrolled in a high deductible health plan (HDHP). As you can probably guess, HDHPs have low premiums but high deductibles. For 2020, out of pocket deductibles can range from $1,400 to $6,900 per year for individuals and $2,800 to $13,800 per year for families. As you can imagine, if you have chronic medical problems or have any large medical expenses planned, a HDHP might not make sense for you. You should seriously consider if these health plans are right for you prior to enrolling.
Next, you enroll in a HDHP through your employer or the healthcare exchange. Your employer should clearly delineate which health plans are HDHPs eligible for HSAs and which are not. If they do not, ask them. Some employers may also not offer HDHPs, and if so, no HSA for you . 🙁
After enrollment, your health insurance company should provide details on how to open your HSA debit/checking account, the first piece of your HSA enterprise.
Next, you determine how much you want to contribute to your HSA debit/checking account, usually through your employer. These contributions are tax-free! Dollars that would have been going to the tax man are now yours forever! This is basically like giving yourself a raise, so do it – you deserve it. But of course there is a limit to how many dollars you can squirrel away into this majestic beast of an enterprise –in 2020, the max yearly contributions are $3,550 for self-only account and $7,100 for a family account.
Once you’ve opened your HSA debit/checking account, the ‘HSA bank’ will send you a debit card and should set you up with an online account. Money will enter this account from deductions from your paycheck.
Now forpart two of the triple-tax advantage – the HSA investment account. At this point, you should have regularly scheduled pre-tax contributions coming into your HSA debit/checking account. But, that money is getting a measly 1% interest if you’re lucky… which is garbage.
Now, the HSA investment account is where the magic happens. To set this up, you usually just need to look around online on your HSA debit/checking account (I know, I know… they don’t make this easy).
Usually yourHSA investment account will require yet another online HSA account, typically held at a brokerage firm – like TD Ameritrade.
Once you have the HSA investment account open, you’re in business! Best thing to do now is set up recurring transfers from your HSA debit/checking account into your HSA investment account to get that puppy funded. Once you got cash in the HSA investment account you can now buy securities – usually a pretty decent selection with stocks, bonds, mutual funds and/or ETFs – the preferred investment vehicle here in Moneyland.
Now guess what? Your money is now growing at a much greater rate than that measly HSA debit/checking account. AND, once you sell off those securities ALL OF THE CAPITAL GAINS are TAX FREE. That’s right. Tax free capital gains.
But how do I get my money?
Yes, all this is nice and all, but how do I get my money? Well HSAs are (somewhat) flexible in how you make this happen.
You have two main options. You can either – use the HSA to pay for qualified medical expenses (as it is intended for) –OR- treat the HSA like a retirement account.
If you decide to treat the HSA like a retirement account and you don’t deduct any of your money until you’re 65 or older, then you just pay your regular ordinary income tax rate at that time. In other words, you treat your deductions like income. Which is the same as traditional IRA accounts, but not as wonderful as roth IRA accounts. Using your HSA this way is not quite a triple-tax free advantage, but pretty close as you didn’t pay any tax on the contributions nor the capital gains.
If you decide to use your HSA funds for qualified medical expenses, swipe that HSA bank debit card for those expenses, keep your receipts as proof for the tax man, and enjoy paying $0 in taxes. You’ve taken full tax advantage of the HSA triple-threat. You can also use your regular credit card or checking account and reimburse yourself from your HSA debit/checking account. What are qualified medical expenses? The IRS has your answer right here.
Also, a few little interesting loopholes – you can use your HSA to pay for healthcare expenses for your spouse and/or your dependents from YOUR account AND you can take money out to cover healthcare expenses incurred from anytime after the HSA was opened.
For example, if you opened your HSA in 2010, broke your foot in 2012 and paid out of pocket healthcare expenses at that time with non HSA money and kept the receipts, you can then “pay yourself back” in 2020 and withdraw the money from your HSA if you’d like. Now, the accounting for all that gets a little confusing, so I advise to keep it simple and just pay healthcare expenses as you go.
HSA: What NOT to do
There are a few things you should definitely NOT do with an HSA —
Enroll in a HDHP just for the HSA. Everyone’s healthcare needs are different. Given that healthcare costs with a HDHP are likely going to be higher if you have ongoing medical expenses, the advantages of an HSA just might not make sense. Further, the triple-tax advantage of HSAs only really magnify over longer time horizons – 10-20 years or more. Put your health first. Otherwise you or your family may never see these monetary benefits.
Withdrawal money for non-healthcare related expenses before the age of 65. Don’t do this. Ever. Not only will you have to pay ordinary income taxes on the money you take out, but also a 20% penalty on top of that. Ouch!
Forget to keep your receipts. This would be a major bummer if the tax man ever decides to give you an audit. Please, please keep your receipts and stay organized.
Not set up an HSA investment account. Without an investment account, you’re missing out on an essential part of the tax advantage – the tax free capital gains! Unfortunately, you will have to set this up yourself… because why should they make it easy for you?
Invest in risky investments or those with high costs. Like any other investment account, you have to be careful as to how you invest. You can lose all your money (although unlikely) or, worse, invest in high cost vehicles that insidiously eat away your earnings.
Realized Citizens of Moneyland will have maxed out their HSA year over year, invest their money thoughtfully, and use their account in the most tax-advantaged manner possible.
Your fearless leader, forever in your debt,
Agree with your leader? Have thoughts on the HSA account or other tips to share? Comment below
As I write this, we are in the middle of a global crisis. COVID-19 has engulfed the planet. Hundreds of thousands of people have been inflicted resulting in thousands of deaths. Not only is COVID-19 wreaking havoc on the lives of countless people across the world, it has also wrecked national economies. Businesses have lost millions in revenues. People have lost their jobs, have been forced to take unpaid leave or have had their paid hours cut back.
The U.S. gig economy has been tested like never before, and is showing signs of buckling under the pressure, as unemployment in the U.S. has hit all time highs. To buoy this sinking ship, the federal government has crafted a massive bailout.
Still, those living paycheck to paycheck are in deep trouble. According to a 2017 study, 40% of Americans couldn’t come up with $400 to cover an unexpected expense. This does not bode well for those workers affected by COVID-19.
But the Citizens of Moneyland should easily be able to weather this economic storm. We citizens understand that we need an emergency fund to cover at least 1-3 months of living expenses, ideally 3-6 months. This is a high impact directive. Our realized citizens will have at least 3-6 months of living expenses saved.
Directive: You Need an Emergency Fund
Why is this important? Because it’s critical financial insurance against the uncertainties of life. Insurance against all the COVID-19 crises, the car repairs (or fires), the puppy’s vet bill, the inevitable surprise medical expense, and the myriad of other unexpected bills that pop up without warning.
COVID-19 and life’s other emergencies will hurt less if you have the financial security to protect against them. An emergency fund is an essential blanket you need to weather life’s storms. It is a must have and a prime directive of our leader. Fully realized citizens of Moneyland will have an emergency fund of at least 3-6 months.
How much should I save?
Start small. Fledgling citizens may try to save up at least 1-3 months of your essential monthly spending. This includes rent, food, debt obligations, and utilities with a little extra cushion just in case. Fully realized citizens should have at least 3-6 months saved.
Where should I keep this emergency fund?
Not under your mattress. Any cash not earning interest is eroding away to nothing with the endless march of time and it’s right hand man – inflation. Keep your emergency fund in a high interest savings account, such as Ally. Sure, you can also keep some cash under your mattress too, just in case. Regardless of where you put it, your money needs to be liquid – readily accessible cash you can get on short notice.
But I can’t possibly save $1000s?!
That’s ok. Start small. Try a $500 or $1000 goal at first. But, you will not be a fully realized, financially independent citizen of Moneyland until you have at least 3-6 months of living expenses saved. You will feel better when you do. Trust this directive.
Your fearless leader,
Don’t agree with your leader? Have some thoughts about emergency funds? Comment below.