The HSA Plan: Your Third IRA

Most people are unaware of this but did you know you probably have a third, COMPLETELY TAX FREE, retirement account?

If you have a High Deductible Health Plan (HDHP), you are eligible to open up an HSA and contribute to it?

What is an HDHP??

An HDHP is just what it sounds like, a health plan with high deductibles. But what are deductibles? The “Deductibles” section in your benefits summary tells you how much money you must pay out of your pocket before your health insurance steps in and pays (See: Deductibles)

So if your deductibles say “$1000”, that means until you’ve paid $1000 out-of-pocket for that year for health services, your insurance won’t step in. Keep in mind this does not apply to everything.

So what is an HDHP?

In 2014, an HDHP is a health plan with a minimum deductible of $1250 for yourself or $2500 total for your family.

In my case, my benefits offered a $1000 in-network deductible or a $2500 out-of-network deductible. (See: Minimum Deductibles)

Because my in-network deductible does not meet the minimum requirements of $1250, my health plan is NOT an HDHP (ughhhh!).

If your health plan does meet the minimum requirements, consider opening an HSA if you haven’t already done so. You can generally find this in the “Summary” section of your benefits package. Here’s an example of the Bronze package from www.healthcare.gov

This is an example of a deductible that does meet the minimum requirements for an HSA. Because the deductible is so high. As a result you’re also paying less on the monthly premiums.

And actually, most of the Healthcare.gov packages are eligible for HSAs because most of them have high deductibles!! (yeah thanks for that Obama /sarcasm)

Regardless, here’s why you should open an HSA:

Your HSA has IMMUNITY to TAXES

Your money in an HSA is one of the few places that is invulnerable to ANY TAXES. Money enters your HSA TAX-FREE. If you use it for medical expenses, it also leaves your HSA TAX-FREE.

Your maximum contribution to your HSA for 2014 as a single person is $3300. For 2015 the contribution limit is $3350. (See: Contribution Limits)

Here’s a scenario:

You contribute $3300 for a few years. Then you suddenly have a kid. You can use the $10,000 in your HSA towards those medical expenses. You decide to continue contributing, maybe not the full $3300, over the next 20 years. By the time you’re 65, you’re retired. You’ve already started withdrawing money from your 401k at a tax deferred rate. But wait! Now you also have an HSA that you can withdraw from at a tax-deferred rate. It’s like having TWO 401Ks!!

Here’s another variation to the scenario:

Let’s say you decide to pay your medical bills for that kid up front using cash because you’re just baller status like that and decide not to expense the $10,000….yet. That $10,000 sits in your HSA.

Fast forward. You’re now 65. You remember might have had a kid a while back but you’re not sure because you’re 65 and your memory is a little hazy. Good thing you kept those medical receipts!

Wait. You lost them?

Good thing doctors and hospitals keep medical records of you!

Take this and expense it. What was once $10,000 in your HSA has now grown over the years, compounding interest. You can now withdraw the $10,000, STILL TAX FREE, and keep the gained interest in your HSA.

Because of this, if you have an HSA, you may want to consider maximizing this out along with your 401(k) a part of your financial planning.

It’s a win-win!