What are HSAs (and why are so many Millennials using them)?
Introduction
I used to think that getting money for a healthcare savings account was just a way for my employer to avoid paying higher wages. But then I learned about all of the benefits, and now I'm convinced it's one of the best ways for me (and other millennials) to save money on taxes today and spend more in retirement when we need it most.
According to data from the Charles Schwab 2022 401(k) Participant Study, 48% of Millennials and Gen Z’ers who are offered the option to contribute to a Health Savings Account (HSA) choose to do so. A Fidelity Investments report estimates that a 65-year-old couple retiring in 2022 can expect to spend an average of $315,000 in healthcare and medical expenses in retirement. HSAs are a great way to save money on taxes today, and pay for more healthcare tomorrow.
What does it mean?
HSA is an acronym that stands for "Health Savings Account." An HSA is a type of medical savings account which is used to save money for future medical expenses. They have tax benefits and can be used as a supplement to your health insurance plan.
The reason why millennials love HSAs is because they can save up the money they make from working in their 20s and 30s, so they don't have to pay out of pocket later on when they're older. Finally, unlike a flexible spending account, there are no penalties if you don't use all of your HSA funds by the end of each year. Also, for the 59 million Americans who are participating in the gig economy- YOU own your HSA. So unlike an FSA, changing jobs will not affect your access to the HSA funds.
To be eligible to participate in an HSA-qualified plan, you must have a high deductible health plan (HDHP). For 2022, the IRS defines a high deductible health plan 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, copayments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family. (This limit doesn't apply to out-of-network services.)
You can’t have one if you are eligible for Medicare, or if you are a dependent on anyone else’s taxes, so it isn’t something you can set up for your kids.
How much can I save?
The maximum you can contribute to an HSA in 2022 is $3,650 per year for an individual or $7,300 per year for a family. Bonus: if you are 55 or older, you will have the option to contribute an extra $1,000 to your HSA each year. You can also contribute to an HSA even if you don't have any other medical expenses beyond what is covered by your health plan, your deductible, and out-of-pocket maximums.
As for tax savings, you can deduct the full amount of your contribution (until you max out the above numbers), even if you don't itemize deductions on your tax return. This is a big deal because most people who don't itemize their taxes usually have little or no medical expenses to deduct. As such, they are deprived of the opportunity to use pre-tax dollars in their health savings account.
This means that even if you don't have any other deductible expenses in a given year, you can still make a tax-deductible contribution up to $3,650 for an individual or $7,300 for families (for 2022). For those people who are lucky enough to not have any medical expenses to pay for out of their HSA, they get to take advantage of another awesome HSA benefit: contributions grow tax-free inside your HSA!
Will my job help?
Many employers will contribute to your HSA. This is a great way to save on taxes, and use that pre-tax money for medical expenses. If you spend $1000 on a doctor's visit, you can use the HSA money that the employer contributed before ever having to touch your own.
Do I have to spend it all this year?
One of the most appealing aspects of an HSA is that you can roll over money from year-to-year. Unlike a Flexible Spending Account, where you must use all the money by December 31st, or you lose it, there is no such rule for HSAs. You can keep your HSA forever (which is great news because healthcare costs are only rising), or, once you turn 65, you can use it for non-medical expenses (which includes paying for your Medicare premiums).
Another great advantage of HSAs is that they allow you to invest in stocks and bonds inside the account. If your employer offers information about which investments will get the highest returns on your contributions, then stick with those!
That’s Right! You can use them to invest in the stock market.
One of the best ways to invest in the stock market is through a HSA. Since HSAs are tax-advantaged, you can save more money than with other types of retirement accounts. For example, if you invest $10,000 in an HSA and earn 10% interest each year (and don't pay any taxes), that account will be worth $21,904 after 30 years—a return of over 200%.
In addition to being able to invest in stocks and bonds without paying taxes on any gains until withdrawal or retirement age (65), HSAs allow for mutual fund investment as well. Mutual funds give you access to multiple stocks at once and allow you to diversify your portfolio so that it's less risky than if all your money were invested into one company's stock price fluctuation. You can even start out investing with only $1!
When you're 65, you can use them for non-medical expenses without penalty.
Even though you don’t have to use your HSA for medical expenses after age 65, the good news is that the money you contributed to it over the years will have been invested and grown, so you'll have a nice nest egg to tap into. And when it comes time to withdraw from your HSA, there are no income limitations or penalties for withdrawing funds—so long as they're used for non-medical purposes. (You still have to pay income tax on it...)
An HSA allows you to save money on taxes today, and spend more on healthcare tomorrow.
An HSA allows you to save money on taxes today and spend more on healthcare tomorrow.
An HSA allows you to save the money you contribute and it’s tax-free. You can use these funds at any time for qualified medical expenses, like deductibles and copays, as well as non-prescription glasses or contact lenses, and even orthodontics! You can even pay for a medical expense out of pocket, save the receipt for 20 years, and be reimbursed by the HSA after the money has grown in the stock market.
The cheat code to maximizing HSA's
An HSA is a tax-advantaged way to save for medical expenses. It's similar to an IRA, in that you have a certain number of years you cannot take funds out of it without paying taxes or penalties (though there are some exceptions). The big difference with an IRA is how much more flexible it is: you can use it for things like dental work and vision care, not just retirement savings.
When contributing money to your HSA each year, you want to leave your funds invested so they'll grow over time. If you pay $500 for an orthodontist appointment in 2012 and pull out $500 from your HSA in 2022 for that expense from 10 years ago, that money has grown to over $1,000 tax-free—which means a lot more cash on hand when expensive medical bills hit!
Conclusion
HSAs are a great way for healthy adults to save money on taxes while giving themselves the opportunity to spend more on healthcare as they get older. They're also a popular option among Millennials who want to invest in the stock market and even roll over their savings into retirement accounts when they retire. With all these benefits, it's no wonder that so many people are using them!
Did you find this post helpful? If so, sign up for Thrive Accounting's Monthly Newsletter! You can sign up here. 