Debunking Myths--The Truth Behind HSAs
"You don’t need it."
Truth: Yes, you do.
There are some pretty tough (but true) numbers coming your way: 81 and 76. According to the Centers for Disease Control and Prevention, these are average life expectancies for women and men, respectively, in America. These numbers are important because if you retire at 65, the average retirement age, you could be looking at anywhere from 15 to 30 years of health care expenses.
Now let’s talk money. A couple retiring in 2016 will need $260,000 to cover their medical costs assuming they live to the average life expectancy. This doesn’t include long-term nursing care, which could bring the grand total to $390,000. Ouch. Plus, health care costs show no signs of slowing down. In fact, health care costs are surpassing inflation by 4.5 percent annually.
How are you going to pay for your medical costs during (your potential 30-year) retirement? Pairing an HSA-qualified health plan (also known as a high deductible health plan) with an HSA is a great place to start. If you’re enrolled in a HSA-qualified health plan through your employer, you can easily open an HSA to help pay for current medical expenses, or save money for future medical expenses.
Did we say this money can be saved tax-free? See Myth 4 to learn more about this benefit booster.
"You can only use it for what's covered in your health plan."
Truth: You can use an HSA for a lot more. In fact, you can use it for things that are NOT covered in your health plan. (The list is pretty long).
Do you have back pain? Perhaps you’d rather see a chiropractor than your family physician. Does the sun’s glare make it hard to drive? Prescription sunglasses are on the list. Do you have trouble sleeping? A CPAP machine may work. Broke a tooth, need a crown? Seeing your dentist or oral surgeon is on the list, too. Nerve pain? Perhaps acupuncture can help. Trying to start a family? Fertility treatments are available.
There are a lot of medical procedures, therapies, and supplies that you may use now, or will need in the future, that don’t fall under a traditional health plan. But you can use your HSA funds for all of these medical expenses. More good news, right?
"You must pay for physicals and immunizations."
Truth: You can get preventive care (usually without using your HSA funds).
All HSA-qualified plans include preventive care. This means your routine physicals with your doctor, immunizations, and cancer screenings do not count against your deductible. In other words, you do not have to pay for them out of your own pocket and you can keep saving your HSA funds for other medical expenses.
"You won’t save money."
Truth: You can save quite a bit tax-free.
You can save thousands of dollars tax-free, depending upon your income and how much money you choose to put into your HSA over time. In fact, an HSA is the only savings account with three tax-saving benefits:
First, you can reduce your taxable income and in doing so reduce your federal, state (except California, New Jersey and Alabama) and FICA taxes.
Second, the money in an HSA can be saved or invested tax-free similar to your 401(k).
Third, the money can be taken out tax-free, as long as it is used for qualified medical expenses.
(Plus, there’s something magical that happens when you turn 65. But we’ll get to that next time.)
"If you don’t use it, you’ll lose it."
Truth: If you have a balance at the end of the year, you won’t lose it. In fact, you can save it and watch it grow.
Many people get a bit confused about all of the acronyms thrown around when it comes to health care. FSA? HSA? First, there are a lot of differences between a flexible spending account (FSA) and a health savings account (HSA). But the big one is this: Unlike an FSA, the HSA is not a “use it or lose it” benefit to be used within a year. Instead, you can keep saving your HSA funds, and take the money you’ve saved in an HSA with you if you change jobs or find yourself in between jobs. The money is yours. Repeat: The money is yours.
"You need a lot of money to open one."
Truth: No you don’t.
You don’t need a minimum balance to open your HSA (but you must make a contribution to your HSA before it’s officially active). And you need to be enrolled in a HSA-qualified health plan either through your employer or on your own.
What makes a plan HSA-qualified? First, it will have a deductible (the amount you pay before your health coverage kicks in) that is at least $1,300 for an individual and $2,600 for a family. There are also benefit design requirements that need to be met (such as an out-of-pocket maximum) for a plan to be considered HSA-qualified.
To open your HSA, you’ll need your social security number and a bank account for claim reimbursements and deposits. Be aware that you cannot be on Medicare or be claimed as a dependent on someone else’s tax returns. And, if you have a flexible spending account (FSA) with your HSA, your FSA will need to be limited to cover dental and vision only.
"Nobody else can contribute."
Truth: Anyone can contribute to your HSA.
Your employer can contribute to your HSA, or your parents, grandparents, friends, and even Aunt Sally. But you’re the only one who gets the tax benefits. If a friend wants to add money to your HSA, that’s awesome. Just remember, come tax time, don’t forget to claim the deduction.
"HSAs are for the wealthy."
Truth: No, they are not.
Some critics say that HSAs are great — if you’re wealthy. After all, rich folks can max out their accounts and take full advantage of the triple tax benefits, right? Remember: no taxes going in, no taxes on investments, no taxes taking money out (if used for eligible medical expenses).
Believe it or not, millennials are actually signing up for HSAs faster than any other segment of the population. Considering millennials tend to have lower incomes than baby boomers, HSAs are clearly not just about tax savings for the rich. They are a smart way to save for health care expenses now and in the future. Remember, even if you put money in today and spend it tomorrow, you’ll still save money on taxes, no matter what your income is.
"HSAs can only be used for eligible medical expenses."
Truth: Yes and no.
To reap the tax-free trifecta we’ve discussed, yes, you do need to use your HSA for eligible medical expenses. (Review Myth 2.)
But if you choose to use your HSA for something other than medical expenses, like a vacation, you’ll pay a 20 percent penalty, plus taxes. (Tip: You might want to wait until you turn 65 for that vacation.) Here’s why: When you turn 65, you can use your HSA funds for anything, and you’ll pay only the income tax. This is similar to a 401(k). We’ll circle back to this gem later in this article.
"You can’t invest the money."
Truth: You can invest it.
In addition to saving your HSA dollars, you can grow your money by investing it, just like you do with an Individual Retirement Account (IRA). Like an IRA, your HSA investment portfolio can include all types of investments, such as mutual funds, bonds, stocks, and certificates of deposit.
At Capital Blue Cross, you can invest in mutual funds after you have at least $1,000 in your HSA. With an HSA of $10,000 or more, additional investment opportunities become available.
Note: You cannot move stocks into your HSA, but after you make a deposit, that money can be invested in whatever you and your financial advisor think is best.
"You must use it for every medical expense."
Truth: Nope. Keep your receipts and make a tax-free withdrawal anytime in the future.
It’s not mandatory to pay for every medical expense from your HSA, every time. In fact, it can be advantageous to pay out-of-pocket for health care expenses you can afford to cover now, and keep saving (or investing) your HSA funds tax-free.
It’s up to you to decide when to reimburse yourself for your health care expenses. There’s no time limit. Tomorrow, next month, or into the next decade (and beyond) are all okay. Just make sure you keep your receipts or upload them online for safekeeping.
Let’s say you buy new prescription eyeglasses with cash. Keep your receipt and pay yourself back when you’re ready with your HSA funds, which will have been saved (or invested) tax-free, and you’ll be reimbursed tax-free, too. Of course, this eyeglass example demonstrates a small amount of tax-free savings. If you save your HSA funds for years, the tax-deferred growth and savings could multiply considerably.
Running low on your HSA funds? Again, save those receipts and documentation, then reimburse yourself later when your HSA is replenished.
Remember, as long as you had an HSA when your expense occurred, you can use HSA funds years later.
"You’d be better off with an IRA than an HSA."
Truth: It depends on what you are going to use the money for.
As far as investments go, an IRA could be a better bet for covering non-medical related expenses in retirement. But if you need health care as you age, an HSA could be a better option.
Here’s why. There are two main differences between IRAs and HSAs. First, the HSA is designed to help cover medical expenses now and in the future. The tax-free nature of saving, investing or spending your HSA funds — for medical expenses — is unmatched. And at age 65, you can use your HSA funds to pay for Medicare and other healthcare premiums, tax-free.
With an IRA, you can use your money for whatever you want to, including medical expenses. But if you use your IRA for medical expenses, you’ll be taxed.
And as mentioned earlier in this article, you can use your HSA funds on whatever you want as well, just like an IRA, once you turn 65. At this point, if you choose to use your HSA for non-medical related expenses, you’ll only pay the income tax, and avoid the 20 percent penalty that would apply before age 65.
The second difference is that an HSA does not require a minimum annual distribution. Funds can roll over year after year, earning interest and investment returns tax-free. In other words, you can keep saving and investing your HSA, tax-free, without having to take money out each year. An IRA, on the other hand, does require a minimum annual distribution when you reach age 701/2.
"You can’t rollover your IRA into an HSA."
Truth: Yes, you can.
You can rollover your IRA funds to an HSA but only one time (in a lifetime). Also, the amount will count toward your annual HSA contribution limit for that year. This means that the amount you rollover, along with your other yearly HSA contributions, can’t exceed your annual HSA contribution limit.
"If you’re 55 and want to open one, it's too late."
Truth: No, because you can make catch-up contributions.
If you’re 55 or older, and you’re still HSA-eligible, you can contribute up to $1,000 more per year to your HSA. With new pending legislation, this amount may change (and potentially increase).
However, when you enroll in Medicare, you will not be able to make any HSA contributions, or the extra $1,000 catch-up contributions. This is because Medicare isn’t an HSA-eligible health plan (HDHP).
The HSA: Health care that’s all yours.
Hopefully we’ve clarified a few HSA myths for you, and you’ve learned a few things along the way. From enjoying tax-free savings, to investing in your retirement — an HSA is a smart move for just about everybody. It’s your health care after all – it makes sense that you should own it.