Welcome fellow Dukes! Today’s the day we talk about our first step to fortify the kingdom with extra defenses!! Just to quickly catch up on what you’ve accomplished so far (celebrate this!) – let us review:
First things first, you laid down your foundation by filling your coffers with cash each month, creating a budget to track it, and made the commitment to financial stability. Following the foundations, you constructed the walls, roof, and windows for your kingdom through your company 401(k) match, emergency fund, credit card, and building yourself a milestone map.
Now it is time to put up your first defense (if you qualify), a Health Savings Account (HSA)!
What in the world is a Health Savings Account?
“A type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. A Health Savings Account can be used only if you have a High Deductible Health Plan (HDHP).”
Referenced from the HealthCare.gov website.
Duke of Dollars Definition
A savings account you can profit from by creating another pre-tax investing opportunity (3.4K for self-only HDHP coverage or 6.7K for family) to save tax mula.
HSA money grows tax-free until withdrawal after age 65, where it will be taxed at your income tax bracket, or, the same invested money can be used for qualified medical payments, without being charged the tax for use. Stated differently, a tax-free contribution and tax-free distribution to pay those expenses.
For us FIRE chasers, we can save on uncle sam’s tax bill while growing pre-tax money alongside your 401(k). For self-only HDHP covered individuals, this means almost $22,000 (maxed out HSA + 401(k)) can be reduced from your tax bill each year.
That’s $5,500 if you are in the 25% tax bracket!!
Add in another $5,500 from your a traditional IRA (if you choose to do so) and KAMBAM!
$6,827 saved on your tax bill!
Savings based only on a federal 25% tax rate.
We will go into more specific details on HSAs below.
A Bit of HSA History
The Clinton Healthcare Plan sparked a national debate over the government’s involvement in the medical profession. The debate continues even today with the question: “is health care a right or a good?” We are not going to get into the political debate here, only highlight it being part of the HSA’s history. Medical Savings Accounts came first from Clinton, leading to HSAs later from President Bush.
“Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder’s spouse, or the account holder’s dependent(s).” – From IRS Publication 969
Archer MSAs allowed eligible individuals (limited those meeting the following: didn’t have health insurance, were self-employed, or small employers with 2-50 employees) to save for future qualified medical expenses. The limited eligibility didn’t deter Americans, as they were widely used and accepted.
With President Bush promising to expand MSAs, he did just that through Medicare expansion. He changed the name from Medical to Health Savings Account and required them to be linked to High Deductible Health Insurance Plans. MSAs still exist today for small employers or self-employed individuals with an HDHP.
Both MSAs and HSAs mixed capitalism with socialism within the US medical profession. The HSA was officially Approved by Congress in 2003 and became law in January 2004. For those in High Deductible Health Plans, the opportunity to take advantage of the new accounts began!
How can you qualify for an HSA?
Straight from the IRS:
- You are covered under a high deductible health plan (HDHP)
- You have no other health coverage except the following:
- Liabilities incurred under workers’ compensation laws,
tort liabilities, or liabilities related to ownership or use
- A specific disease or illness.
- A fixed amount per day (or other periods) of hospitalization.
- Coverage plans for the following:
- Dental care.
- Vision care.
- Long-term care.
- Liabilities incurred under workers’ compensation laws,
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone
else’s 2016 tax return.
What is a High Deductible Health Plan?
An HDHP has the following characteristics:
- Higher annual deductible than typical health plans
- A maximum limit on the sum of annual deductible and out-of-pocket medical expenses that you must pay for covered expenses.
- Includes co-payments and other amounts, but not premiums
HSA Min/Max Amounts
|Self-only coverage||Family Coverage|
|Minimum annual deductible||$1,300||$2,600|
|Maximum annual deductible and other out-of-pocket expenses (in-network)||$6,550||$13,100|
If you meet the minimum criteria here, and the qualifications above -> you are golden to open your HSA!
You still qualify for an HSA if your HDHP provides preventive care benefits without a deductible or with one less than the minimum annual deductible, such as periodic health evaluations (physicals).
- Self-only plan? $3,400
- Family plan? $6,750
For those who are of age 55 or older at the end of your tax year, you can contribute an additional $1,000 to your HSA.
What if I’m married and we have a family coverage from each employer?
The IRS states that if either spouse has family HDHP coverage, both are treated as having that coverage. This means that even if both spouses had family coverage qualifying for an HSA, the total that family can contribute is $6,750 total – even if both spouses have their own plans.
Can my employer contribute?
Yes! Employers can directly contribute to your HSA, your spouse can as well. The imperative point here is these contributions count towards the limit, unlike 401(k)s.
In other words, if your employer contributes $3,400 for the given year to your self-only HSA qualified plan, then you can’t contribute.
HSA providers require specific balances before you can use your HSA as an investment account vs a savings account. We will talk more about this in part 2.
Do I lose it if I don’t use it?
HSA account balances roll over each year. Further, if you were to change jobs and you opened your HSA through that employer, you are still in control of that account and your money. Similarly to 401(k)s.
Even more awesome is that if you were to save receipts from your doctor visits starting today, even if you paid with after-tax money, you can utilize those receipts later with reimbursement coming from your HSA balance. Talk about an interesting emergency fund strategy if you wanted an extra backup plan (almost like plan Z?).
HSAs can be a great vehicle to take advantage of pre-tax investing dollars and tax savings. We’ve only just hit the surface and will go into more details on opening an HSA, investing in an HSA, and utilizing it in your Kingdom’s plan in our next post.
Do you currently use an HSA? Have you found it useful? Let us know in the comments!
Thanks for reading and let us know if you have any questions!!