Health Insurance is top of mind this time of year in many households. Open enrollment is from November 1 to December 15, you can shop for a new insurance plan through government healthcare exchanges—but you’ll face several choices, such as which coverage level to purchase and whether to open and fund a healthcare savings account (HSA)—a rainy-day savings fund for medical expenses that, if untapped, can be used as a future retirement account.
Because insurance plans carry a monthly premium (a flat fee) as well as a deductible (a total annual amount you pay for certain types of visits before insurance “kicks in”), consumers must assess not only what they can afford to spend on premiums but also how much coverage they need and how high a deductible they are prepared to pay. If they want to use an HSA, they’ll also need to opt for an HSA-eligible (typically lower-premium, high-deductible) insurance plan.
“It’s a complicated landscape,” says Aaron Rubin, a CFP with Werba Rubin Wealth Management in San Jose, California. “Younger clients are concerned about the medical coverage included in their insurance policy—and they often wonder if they should choose a plan with a high deductible and then invest in an HSA. Meanwhile, the wide elasticity in health plans for seniors requires some strategy.”
It’s important to take a look at what you spend out-of-pocket on healthcare and what coverage is available via an employer—or, if self-employed, through an insurance exchange. Peter Newman, a financial advisor with Peak Wealth Planning in Champaign, Illinois, advises adults who have relatively low healthcare costs and who can make maximum contributions to their 401k or IRA to invest in high-deductible insurance and then fund an HSA.
But this is income dependent, he notes.
“If you can’t even invest fully in your 401k or IRA right now, don’t forego those savings to invest in an HSA,” Peter Newman says. “However, if you can fund retirement and then additionally fund an HSA it’s a helpful tool.”
For some adults, however, electing expensive but thorough coverage (high premium, low deductible) is a wise idea—especially if they are managing chronic conditions with expensive treatments or prescriptions or they’re anticipating expensive healthcare costs such as planned surgeries or a pregnancy, notes Newman.
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Taxes and savings considerations
There’s yet another consideration to throw into the mix: Taxes. Forego health coverage and you’ll pay a tax penalty. Buy insurance and your premiums (monthly payments) are tax deductible while your co-pays (fees not covered by insurance) are not—but don’t over-buy expensive insurance just to get a deduction on it or for fear of co-pays, advisors say.
One reason advisors are bullish on HSAs is that they help adults self-engineer a healthcare cushion outside their insurance policy which, if not needed for healthcare costs, creates an added layer of long-term savings. Funding an HSA is tax deductible the year you invest and can lower your overall adjusted gross income—which has repercussions for your entire tax return. If the money you place in an HSA is invested in securities the earnings on those securities grow tax-free (making the HSA useful as a retirement savings vehicle over time) and your HSA funds are also tax-free at withdrawal when used for applicable medical expenses.
Some self-employed individuals may also be able to deduct healthcare expenses without using an HSA if their bills reach a certain percentage of adjusted gross income, Newman and Rubin note. However, an HSA is still a viable vehicle for those consumers, too. During 2018, individuals can invest up to $3,450 (up from $3,400 in 2017) and families up to $6,900 (up from $6750 in 2017) in an HSA.
HSA as backup medical and retirement funding
Americans spend an average of $9,237 apiece per year on healthcare (including insurance premiums), according to medical journal The Lancet. Generally, older adults spend more on healthcare than younger adults—and rising healthcare costs during retirement are a major component of planners’ future spending estimates.
“Medical costs are expected to outpace inflation by 4.5% to 6.5%, so having funds in an HSA is one way to help beat medical inflation,” Newman says.
Using the example of a healthy single 40-year old making a $3,400 per year investment in an HSA, Newman calculates that with a 4% return on investment that at the end of 25 years this investor would have $141,000 available at age 65. This funding can help with early-retirement medical expenses or as a cushion that helps push back Social Security withdrawals.
Don’t confuse an FSA and an HSA
When shopping for insurance and considering funding a healthcare savings account, some consumers are confused by employer-offered “FSA” (flexible spending accounts), some of which have in the past been offered as “use it or lose it” plans (i.e., if you don’t spend the money invested on a particular timeline, you lose it.)
HSAs are not “use-it-or-lose-it” plans both Rubin and Newman note. HSAs exist to help consumers cover uninsured co-pays and they can be used to cover a variety of expenses if those expenses are deemed as part of a doctor’s recommended treatment plan for a diagnosed disease—such as gym memberships for the obese, massage for stress management etc. It’s important to investigate what your HSA can fund.
“Healthcare spending is an important topic,” Rubin says. “Clients want to know they’re covered—but they may not know some of the planning advantages available through HSAs.”
Unexpected healthcare costs are among the top reasons Americans dip into emergency savings or enter bankruptcy, so striking a balance between buying sufficient insurance (possibly while funding an HSA) and over-paying for excessive coverage poses a challenge for many consumers—but one they’ll have to sort through this month and next if changing plans.
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