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Health Insurance and HSAs (U.S. only)
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Hypno Offline
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Health Insurance and HSAs (U.S. only)
This discussion is specific to U.S. tax/retirement/health care law.

High-deductible health plans and HSAs are not new, but they are mentioned much less than IRAs and 401(k)s, so I thought some discussion of the benefits would be worthwhile. My opinion is that these are very good after you have funded your IRA/401(k), and are often overlooked.

OK if you are employed then you know that its open enrollment time in the U.S., where you pick your health insurance coverage.

Here is a tip - go with a high deductible health insurance plan, and contribute the difference in premiums to a HSA - health savings account.

Here is why my employer offers for 2019. The subsidy is modest - if you work for a larger employer you might have much better rates.

For family coverage under a traditional plan (PPO), I pay almost $400 every paycheck (2 weeks). There is an individual $1500 deductible, and a 10% co payment after that.

For family coverage under an HDHP, my cost is about $250. There is a $2750 individual deductible and a $4000 family deductible, and after that no-copayment.

For me, the difference over the course of a year is $3900!

So one benefit of a high deductible plan is lower premiums.

The other benefit is that you are eligible for a health savings account. A health savings account is like an IRA. You defer money from your paycheck into this account. The limits for this are $3500 individual and $7000 family in 2019. Personally I plan to defer the full $7,000. You may only have a HSA if you have a high-deductible health plan.

Why would you want to contribute money to a HSA? A couple of reasons.

First, your deferrals are tax free. In other words, the $7000 I defer into the HSA is not taxed presently. Its not subject to income taxes or payroll taxes. That is a huge benefit.

Second, as long as I spend it on qualified medical benefits (for example, the cost of any care that contributes to my deductible, eyeglasses, testosterone treatments, etc.) the money is never taxed. It comes out of the HSA to the doctor without reduction for income or payroll taxes. Similarly, when I pay my income taxes at the end of year, my taxable income is $7,000 less.

Third, a lot of employers will incent you for choosing the HDHP because its cheaper for them. Mine is going to contribute $1500 to my HSA this year, so really I'm just deferring $5500. (The annual limits apply whether the contribution is made by the employer or employee; this is different from how the IRA match rules work).

Fourth, to the extent you don't spend the money in the HSA, you don't lose it. Better yet, my HSA allows me to invest it like an IRA once I have a $2000 balance. So this money will compound over time, tax free, just like an IRA.

Finally, this is effectively a way around the limits on IRA contributions. In your old age, your medical costs will be a big chunk of your expenses. The HSA provides tax free funds to pay for these, which means you don't have to spend your IRA or other investments to pay for those expenses. And if you are healthy, you can spend the money on non-medical costs, although there is a catch. If you are over 65 and do this, you pay tax on the withdrawals, but that is no worse than an IRA. (And better than an IRA because it gives you the option to pay avoid tax completely by using the funds for medical expenses.) If you take the money out for non-medical uses before age 65, you not only pay income tax but also a 20% penalty. (That's similar to the IRA treatment, except the IRA penalty is only 10% and ends at age 59 1/2).

Now, I'm closer to retirement than many of you, but even if you are young a HDHP and HSA are still worth doing. The benefits are modest, but they compound over time. They are also less lucrative than the benefit of an IRA/401(k), so if you have that option fund that first.

I never gave much thought to HSAs because I don't think about medical costs that much. But the way to think of an HSA is not about medical costs, but about the money you get to keep at age 65 which has compounded tax free).

If you want to dip your toe in the water, try this. Look at the difference between a high deductible health plan and a regular plan. Lets say for you its $77 difference every 2 weeks. OK, sign up for the HDHP and take that $77 savings and contribute it to the HSA. Over the course of a year, it will add up to $2000. My HSA gives me a debit card, and I use that at the doctors office to pay my medical expenses. lets say you get contact lenses, and you have a couple of doctor visits, total $500. You will have paid the $500 with tax free dollars, and at the end of the year you have $1500 that rolls over in your HSA.
11-04-2018 09:18 AM
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Jetset Offline
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RE: Health Insurance and HSAs (U.S. only)
(11-04-2018 09:18 AM)Hypno Wrote:  If you want to dip your toe in the water, try this. Look at the difference between a high deductible health plan and a regular plan. Lets say for you its $77 difference every 2 weeks. OK, sign up for the HDHP and take that $77 savings and contribute it to the HSA. Over the course of a year, it will add up to $2000. My HSA gives me a debit card, and I use that at the doctors office to pay my medical expenses. lets say you get contact lenses, and you have a couple of doctor visits, total $500. You will have paid the $500 with tax free dollars, and at the end of the year you have $1500 that rolls over in your HSA.

This is a useful post, HSAs and FSAs are both not given enough attention in most working Americans' tax planning. I felt pretty stupid when I realized I could use an FSA to buy contact lenses and hadn't been.

Hidey-ho, RVFerinos!
11-04-2018 09:46 AM
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Hell_Is_Like_Newark Offline
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RE: Health Insurance and HSAs (U.S. only)
I have an HSA now which I max out every year. I draw $0 and invest all but $1,000 (which the plan required me to keep in a cash balance account).

I wish I had an HSA when I was younger. My one employer used to break out on our pay stubs the cost of insurance. The total cost (what my employer paid and what I paid) could have covered all my medical costs for the year for the cost of a single month. I mean everything.. right down to a bottle of aspirin.

I got a lot of my compensation in "health insurance" that I didn't need nor use. Out of curiosity, I calculated what I would have had in savings if I had an HSA with a $10k deductible from the day I left college and entered the work force. I even back dated the inflation and used a conservative ROI (lower than what i got on my 401ks).

Even after accounting for a major accident I had about 10 years ago (assuming I paid the full $10k deductible plus other fees), I would have conservatively, $130k in savings, added on top of what I already have in the HSA today.

That is a nice chunk of $$$ to cover the eventual medical bills that will hit me as I get older.

This why the Left rails against HSAs so much.... if they were made mandatory (similar to the system used in Singapore), there would be far fewer people in need of government assistance when it came to medical bills.
11-04-2018 10:00 AM
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Hell_Is_Like_Newark Offline
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RE: Health Insurance and HSAs (U.S. only)
(11-04-2018 09:18 AM)Hypno Wrote:  This discussion is specific to U.S. tax/retirement/health care law.


If you want to dip your toe in the water, try this. Look at the difference between a high deductible health plan and a regular plan. Lets say for you its $77 difference every 2 weeks. OK, sign up for the HDHP and take that $77 savings and contribute it to the HSA. Over the course of a year, it will add up to $2000. My HSA gives me a debit card, and I use that at the doctors office to pay my medical expenses. lets say you get contact lenses, and you have a couple of doctor visits, total $500. You will have paid the $500 with tax free dollars, and at the end of the year you have $1500 that rolls over in your HSA.

Back in the 1990s when MSAs first came out (pre-cursor to HSAs), an insurance company called 'Golden Rule' offered high deductible plans. For a person my age (20s at the time), a plan would cover 100% of medical costs after the deductible up to $3 million (have to adjust that for inflation into today's $$). The deductibles were in the range of $2,000 to $10,000.

The plans (depending on your health, options, and deductible) ranged typically $75 to $125 per month for a guy my age. The plan however, was illegal in NJ which passed an Obama type health law in order to force healthy people to subsidize those who were not. A NJ plan would cost me $600 to $850 per month with no catastrophic coverage (I was responsible for 20% of the medical bills). So I had cancer or got hit by a bus, I would still be bankrupt as 20% of a shitload of money was unaffordable for a kid out of college making less that $30k per year.
11-04-2018 10:06 AM
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Hypno Offline
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RE: Health Insurance and HSAs (U.S. only)
An HSA is similar to a FSA (Flexible Spending Account) but better.

They are similar in that they both take pre-tax dollars to pay for medical expenses.

But HSAs are better for a couple of reasons. First, the annual limits are higher. FSAs are capped at $2500 I believe.

Second, an FSA is use it or lose it. Unused money in an HSA rolls over.

Third, because eventually you can accumulate a nice chunk of change, you can invest the HSA funds while the FSA just sits in cash. The investment choices etc are determined by the sponsor of your HSA. My employer outsources this to a big financial institution, and they require that you have a $2000 balance before you start investing.
11-04-2018 10:43 AM
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monsquid Offline
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RE: Health Insurance and HSAs (U.S. only)
Should I put my HSA into S&P 500?
11-04-2018 11:57 AM
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Jetset Offline
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RE: Health Insurance and HSAs (U.S. only)
(11-04-2018 11:57 AM)monsquid Wrote:  Should I put my HSA into S&P 500?

Fund placement is a whole massive discussion: https://www.bogleheads.org/wiki/Tax-effi..._placement

However, short answer is that an HSA would be ideal for your bond allocation.

Longer answer is that you usually want what you expect to be your fastest-growing investments in tax-free (Roth) space first. (Hopefully, this will balloon your tax-free space over the years and give you the most tax-free income possible in retirement.) Tax-deferred will also convert capital gains into personal income so may be a weaker place for stocks in the long-term.

An HSA is not only tax-deferred (like Traditional IRA/401k), but it's also an opportunity for tax-free health care, so you don't want to risk losing it and might need to access some of it on short notice. Putting it in stocks and getting into a car accident the day the market drops 20% would solve the personal income tax problem, but literally add insult to injury.

Hidey-ho, RVFerinos!
(This post was last modified: 11-04-2018 02:25 PM by Jetset.)
11-04-2018 02:17 PM
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Thomas Jackson Offline
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RE: Health Insurance and HSAs (U.S. only)
My company matches $1200 into this so it is a great way for tax deferred savings. The tax benefits are powerful.
11-04-2018 03:16 PM
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