Why HSAs Are the Most Underrated Employee Benefit
March 24, 2016In one of the chapters in her new book, What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need to Know About Your Money, our founder and CEO, Liz Davidson wrote about how the best place to invest your money is often where you earned it in the first place: your employer. Last week, I wrote about how to avoid common mistakes when investing in your employer’s retirement plan. This week, I’m writing about some common myths causing people to under-utilize one of their most valuable employee benefits: the health savings account (HSA).
HSAs are generally a bad deal. In order to contribute to an HSA, you have to be enrolled in a high-deductible health care plan. The downside is that these plans require you to spend more out-of-pocket before the insurance kicks in. If you have a lot of health care costs, they may not make sense for you. Otherwise, when you add up the premium savings (high-deductible plans tend to be cheaper), any employer contributions you may receive to your HSA, and the taxes saved on your HSA contributions (contributions are pre-tax), you may be surprised to find that they cost you less money overall.
HSAs are use it or lose it. That’s true for FSAs or flexible spending accounts. But whatever you don’t spend from an HSA, you get to keep in the account even if you leave your job or switch to a non-high deductible health insurance plan,. If you like your HSA, you can keep it.
HSAs are only for health care expenses. It’s true that HSAs are only tax-free when used for qualified heath care expenses but if you really needed the money, you could use it for other things. Be aware that you’d have to pay taxes and a 20% penalty in that case. Even better, you can use the HSA for any purpose once you turn 65 so it can be part of your retirement funds. (It’s still tax-free for health care expenses in retirement, including qualified long term care insurance and some Medicare premiums so unlike your other retirement accounts, you can contribute pre-tax AND make tax-free withdrawals.)
HSAs don’t grow. Many plans allow you to invest your HSA as long as you keep a certain amount (generally around $1k) in cash. Just be sure only to invest any money you don’t plan to spend within the next 3-5 years. In fact, I invest as much of my HSA as I can and make it a point not to use it even for health care expenses. After all, I figure that I’ll have health care expenses in retirement so why not let that money grow tax-free as long as possible?
HSA withdrawals for health care have to be in the same year as the expenses. If you have a health care expense and keep the receipt, you can withdraw that amount tax-free in any future date. That flexibility is one more reason to consider not making HSA withdrawals even for qualified health care expenses unless you need to.
Wish you contributed more to your HSA last year? One more myth is the idea that you have to contribute by the end of the year. Like an IRA, you have until April 18th to contribute for 2015. You’ll just have to write a check rather than contribute from your paycheck and if you’ve already filed your taxes, you’ll have to amend your return to get the tax deduction. What are you waiting for?