This time of year has me thinking more about taxes than normal because I recently took a first stab at income taxes for 2015. While doing my taxes I noticed the subject of Health Savings Accounts (HSAs) coming up in a couple different places so I thought I would share why HSAs can be an awesome place to invest your savings.
The main reason that HSAs are great is the ability to pay for things with pre-tax dollars. Depending on your tax bracket, this can be a huge “investment”. Consider going to the doctor and spending $100 from an HSA with before-tax dollars. If you had to use after-tax dollars for that same $100 expense, and you were in the 25% tax bracket, you would need to earn $133.33 in order to have the $100 left over to pay the doctor. Or to look at it another way, by using an HSA you avoided spending $33.33 before tax, which is $25 after tax.
To put that mathematically, the money saved by using money from an HSA instead of after-tax dollars is,
money_saved = (money_without_hsa - money_with_hsa)*(1-tax_rate) money_without_hsa = invoice_amount/(1-tax_rate) money_with_hsa = invoice_amount
which reduces to,
money_saved = invoice_amount*tax_rate
So, if you know you are going to have X dollars in medical expenses, it behooves you to have X dollars sitting in your HSA because you will save X dollars multiplied by your marginal tax rate in after tax dollars.
Common HSA uses
The most common uses for HSAs are basic medial expenses.
- Dentist - use your HSA card to pay for that cleaning or root canal.
- Doctor - doctor bills could be has high as your deductible, so you probably want to build your HSA up to the amount of your deductible to cover large expenses.
- Prescriptions - those Viagra pills are expensive!
- Vision - in addition to regular visits to the eye doctor, you can use HSA funds to pay for eyeglasses and eye surgeries including laser surgeries.
Lesser Known HSA uses
Here are some ways to use HSA dollars that you may not have heard about.
- Long-Term Care (LTC) premiums - there are limits, but LTC policy premiums
can be paid in part using HSA dollars. The older you are, the more of your
premiums are allowed to be paid using HSA dollars. For tax-year 2015 the
limits are as follows:
- 40 years old and younger – $380
- 41–50 years old – $710
- 51–60 years old – $1,430
- 61–70 years old – $3,800
- 70 years old and older – $4,750
- Medicare premiums - you can’t continue contributing to your HSA after you hit medicare age (65). But you can use your HSA funds to pay for supplemental Medicare insurance such as Medicare Part B, D or Medicare Advantage. This is a good reason to contribute above and beyond your deductible level before you hit age 65.
- Construction expenses - as you get older, you may find you need to need to make modifications to your house. Construction expenses to accommodate somebody with medical issues may be paid for using HSA funds. Examples include wheelchair ramps, hand rails, widening doorways, etc..
- Vasectomy - pair your vasectomy operation with your Viagra prescription and put the whole thing on your HSA debit card!
There are a ton of other things you can use HSA funds for. Check out the IRS publication for details.
In the grand scheme of investing, HSAs are generally considered the 3rd priority behind (1) getting your 401k match if you have it and (2) paying off credit cards. Besides the advantages described above, HSAs also act like an IRA in that the growth of funds inside the HSA are tax deferred. While you can take the funds out after age 65 and be taxed on them just like an IRA, it’s probably best to leave your money in the HSA and continue using it to pay for medical expenses until the HSA is drained.