Health Savings Accounts consist of two parts - the high
deductible health plan (HDHP), and the HSA itself. By
carefully choosing which bank you use to establish your
HSA, and strategically choosing how to fund your account
and manage your investment, you will be able to get the
most return on your money while keeping your expenses to a
minimum.
Make Sure to Establish Your Health Savings Account
By switching from a conventional copay health insurance
plan to a high-deductible health insurance plan (HDHP),
most people are cutting their health insurance costs by
about 40% or so. This is such a big savings, that many
people neglect to take the next step and set up their HSA.
But this is a financial mistake that is costing them money.
Unless you pay no income tax and have zero medical expenses
(including dental, over-the-counter medications, or charges
for alternative care like chiropractic or acupuncture), you
will absolutely save money by establishing your HSA.
Run All Your Medical Expenses Through Your HSA
Not everyone feels like they have "extra" money that they
afford to set aside in their HSA, despite the tax savings
and other financial benefits. Even if that's the case, you
should still establish your HSA. Every time you incur a
medical expense, deposit at least as much money as you
spent on that medical expense. For instance, if you went
to the dentist and it cost $85, put $85 in your HSA. If
you like you can then take it right back out.
What this does is convert this medical expense into a
tax-deductible expense. Then when you file your taxes next
year, you can put the total amount that you ran through
your HSA on line 25 of your 1040, and deduct it from the
total income you report.
Cover Your Deductible
Your next step is to get enough money in your HSA to cover
your deductible. For 2008, deductibles range from $1100 to
$5600 for individuals, and $2200 to $11,200 for families.
Annual contribution limits are $2900 for individuals, and
$5800 for families. So it could take a couple years or
longer to get enough money in your account to cover your
deductible.
Once this money is in your HSA, you will have the
confidence of knowing that you can cover most any medical
expense that comes your way, particularly if you have a
health insurance plan that pays 100% after your deductible.
As you continue to build money in your account, you may
want to consider switching to a health insurance plan with
an even higher deductible, which will further lower your
premiums.
Minimize the Fees You Pay
If you will be using your HSA to pay medical expenses as
you incur them, you should keep an eye on the fees your
bank charges. Until you have enough money in your account
to cover any fees with investment returns, you probably
want to have your HSA with a bank that charges no fees.
(Several are listed on the website referenced above).
If you plan to access money from your HSA to pay ongoing
medical expenses, you may wish to keep a portion of your
HSA money in a savings account or short-term CD. But to
take maximum advantage of your HSA, you'll want to
eventually move some of the funds to investments that have
a higher potential return.
Investment Options
No other investment has the triple tax-advantage that
Health Savings Accounts offer. Not only is your deposit
tax deductible, and your withdrawals to cover medical
expenses tax-free, but your investment also grows
tax-deferred.
Taking advantage of tax-deferred growth is one of the best
ways to build long-term savings. Some banks will provide a
short list of mutual funds you can invest in, while others
provide access to an online discount brokerage such as
Ameritrade where you can choose from stocks, bonds, mutual
funds, and more.
The most aggressive strategy is to pay your medical
expenses from somewhere other than your HSA, and save the
receipt. You can then reimburse yourself at a later date.
The additional growth you get from not paying any taxes on
your investment may be enough to cover all your medical
expenses.
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By Wiley Long - President, HSA for America (
http://www.health--savings--accounts.com ) - The nation's
leading independent health insurance firm specializing in
individual and family coverage that works with a Health
Savings Account.
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