2011: The Year of the Health Savings Account

I admit that I have been lax when it comes to my health insurance. I’ve been lax because I’m still paying for a regular family insurance plan. For two years (at least) I’ve been saying that I want to open a Health Savings Account (HSA). But I’ve never actually done it. Which has been terribly remiss of me. Here are two reasons that I should have opened a HSA long before now:

1. The contributions are tax deductible.
2. More money would have been going to me — instead of to the insurance company.

Really, in my situation, there is no reason for this to have gone on so long. This became especially apparent to me as I sat with my accountant a couple weeks ago, looking at my tax bill. It would have been smaller had my health expenses been tax deductible. Unfortunately, my AGI has reached a point where the unreimbursed health costs I have no longer amounts to 7.5% of my income. Therefore, they were not deductible when I itemized, and my taxable income was higher because of it.

So this year I’m doing it for real. I’m switching to a high deductible health plan, and I’m opening a Health Savings Account.

HSA: More Money for Your Own Use

One of the maddening things about health insurance, especially when you are reasonably healthy, is that you spend hundreds of dollars a month for coverage that you aren’t using. My family of three spends $600 a month in premiums. We average three to five office visits a year — two to three of which are preventative visits. We have some regular medications covered, but they aren’t that expensive. The expensive one is something my insurance company won’t cover anyway (perhaps their way of forcing me to retain maternity coverage), so I pay for it out of pocket.

If I had a health savings account, my monthly insurance premiums would be cut by half. Yes, I would have to pay out of pocket for more items. But even if I paid out of pocket for all the medications, and the office visits, it still wouldn’t come close to approaching the high deductible — and I’d still be paying less. My total health care costs right now for co-pays, out of pocket expenses and insurance is more than $9,000 a year. Most of that is health insurance. However, just by switching it up with a high deductible plan, I could save about $3,000 a year.

If I put that money into a HSA — or even half that money into a Health Saving Account– it would work to my benefit. Indeed, there is an investment element to the HSA, which means your money is working for you. It grows in your account, and can be withdrawn at any time for qualified medical/health costs. And, even if you don’t use the money for qualified costs, it’s still yours. If you are willing to pay a tax penalty and income tax on your withdrawals, you can take money out even for costs that are related to health care. Once you pass the age of 65, you can withdraw the money for anything without paying the tax penalty (you still have to pay income taxes if you aren’t using the cash for qualified expenses).

It’s like having another tax advantaged retirement account, but it doesn’t affect your ability to max out your IRAs and 401ks.

For me, it’s a great idea. Tomorrow, we’ll review the health savings account rules and look at who shouldn’t be getting a HSA.