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There are a number of financial products out there that get a ton of news coverage, like 401(k) plans, life insurance, bank accounts and others. A product we don’t hear about too often—one that has a great value but is underutilized—is the Health Savings Account, or HSA for short. If you don’t have one, you are likely missing out on a fantastic opportunity to save money and provide tax savings for you and your family.

What is an HSA?

An HSA is a bank account or an investment account where you can put money aside to save for medical expenses. It is available to anyone who has what is called a High Deductible Health Insurance Plan (HDHP). This is a plan where you pay a bit less for the insurance but you pay a bit more prior to the insurance company kicking in their share.

For 2021 the IRS defines a HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments and coinsurance) can’t be more than $7,000 for an individual or $14,000 for a family. (This limit doesn’t apply to out-of-network services.)

If you qualify, then an HSA provides you with a tax break when you put the money into the account, and tax-free withdrawals for qualified medical expenses when you use the money. This is essentially like combining all the good features of a traditional IRA with the benefits of a Roth IRA. Of course, you don’t primarily set this up for everyday expenses, but rather medical expenses. We all know that at some point in our lives it’s likely we will have medical expenses to pay. You can even roll over unused funds from year to year and potentially save this account to use in retirement.

Did you know you can even use this money to pay your medical insurance premiums? It’s basically like getting to deduct your medical insurance!

How does this work?

You can contribute $3,600 in 2021 if you are single, and $7,200 for a family. If you are over age 55 you can put away an extra $1,000 per year in this strategy. The amounts for 2022 will go up to $3,650 and $7,300 respectively.

You can put all of the above amounts into one account or you can split them across a number of accounts, like one for husband, one for wife, one for each child.

Keep in mind that a HSA cannot be established if you are already on Medicare, as it doesn’t qualify as a HDHP.

Let’s illustrate how this can benefit you in practice. Assume you placed $7,200 into an HSA for 2021 for your family and you make $100,000 for the year. Let’s assume the HSA grows at a rate of 5% per year and you leave the funds in the HSA for 5 years before using it. Here are the benefits to you:

In 2021 you made $100,000 and you were in the 24% tax bracket, so the contribution of $7,200 saved you $1,728 in taxes in 2021 ($7,200 x 24%). Then at the end of 2025, five years later, you would have $9,189 to use for qualified medical expenses—and you do not have to pay taxes on that money.

Let’s contrast this with the savings in a traditional IRA and a Roth IRA. In the case of a traditional IRA with the same investment, you would save the same $1,728 for 2021, but later, if you were to take out the $9,189 (assuming you were paying the same 24% tax rate) you would owe the IRS $2,205 in taxes on the $9,189.

By contrast, if you used the Roth you would not have saved the $1,728 initially but you would have been able to take out the $9,189 tax-free five years later.

With the above calculations you can see the power of what the HSA can provide to you and your family. Furthermore, the fact that the average person in retirement will pay $300,000 in medical costs demonstrates that this is definitely money you will have the opportunity to use.

How do I set this up?

I am here to help, so definitely use me and Red Barn Financial as a resource. Contact me at 615-619-6919 or smoran@redbarnfinancial.com with any questions.

If you would like to do this on your own, a good place to start is healthcare.gov, or reach out to your local bank. An HSA account can be started as a bank account, but can later be converted into an investment account, or you can set one up at one of the major brokerage houses. Again, I’m happy to help you. You will likely want to convert it into an investment account because bank account yields are so incredibly low. One pitfall to look out for is that some banks charge a monthly fee for an HSA, and if you get one that charges a fee higher than the interest you earn, then you are actually losing money on the account.