Why You Need An HSA ASAP!

First, you are probably asking what's an HSA? And Who are these good looking doctors?

(Shamelessly) The latter is just clickbait. You are now trapped into reading a 5 min article all about Health Saving Accounts (otherwise known as HSAs). Welcome to learning.

The Internal Revenue Service's (IRS) definition of an HSA:

...A tax-favored medical savings account available to taxpayers. HSAs enable taxpayers to pay for current medical expenses and save for future qualified medical expenses on a tax-free basis.

HSAs are owned by individuals, but contributions may be made by an employer or any other person. Amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay for or reimburse qualified medical expenses.

The Translation: It's a great way to save on your medical expenses during the year and for the rest of your life.

Background:

I found out about HSAs around the primaries before President Trump was elected. Instead of the CNN and MSNBC noise, I listened to an NPR segment for an hour so you wouldn't have too. Which broke down information as the news used too (objectively).

Some Republicans were arguing that we all should get HSAs instead of Universal Health care. That obviously imploded but it wasn't a terrible idea.

High Deductible Insurance Health plans aren't easy to understand (at first). They aren't favorable if you have any pre-existing conditions (arguably no insurance is). On top of that, your money is stuck paying for just medical expenses and trips to Walgreens, CVS, or Rite-Aid for qualifying items. However, rich affluent people use HSAs so it begs the question why? After running the numbers, if you are young with a solid family health background, it's not a bad look. I'll attempt to break down why. I say attempt because cramming a brand new concept down to a 5-minute read is insane. But don't worry, I'll do all the math for you.

Free resource: Money Management estimator

It's one of the best ways to save on autopilot.

Example:

For basic insurance, you pay a premium of $35 per paycheck. You have a low deductible of $500 (for example) and if you get injured for anything over $500; your insurance covers it. That's a total of $910 per year on medical insurance.

For an HSA + High Deductible insurance plan, you will pay a higher premium of $62.40 per paycheck. You have a high deductible plan of $1,350 (IRS mandated subject to increases) and if you get injured for anything over $1,350 - $6,750; your insurance covers it. Over the $6,750, well...

That's a total of $1,622.40 per year on medical insurance. But here's the twist with an HSA, part of your premium is sent to your new Health Savings Account per month at $42.50. This amount adds up to $510 per year that you can use for medical expenses. You can add up to $3,500 for individuals and $7,000 for a family. All of which rolls over and accumulate until you need it. The maximum invested for 20 years that's $70,000 for starters. Let's me get to the entrée with the benefits.

Benefits of an HSA:

1. Pay period contributions reduce your payroll taxes. If you wanted to max out from the HSA example by covering the $2,990 difference; it would take you an additional $115 per pay period. This would equate a tax saving of 7.65% or $228.74 for the year. It's a funny math thing. Go with it.
2. It's tax-deductible at any income level and tax-deferred as it grows. For example, if you are in the 12% tax bracket, that's roughly another $420 per year. It's another math thing. Go with it. So far you are saving up to $650 per year in taxes. This ends up being a cost-efficient way to handle your medical expenses.
3. You can use it for any medical expenses. It counts for Dental, for rehabilitation, etc. When you convert your plan for the family; if you decide to have kids, you can cover it. Your kid runs into a tree, it's covered. Imagine saving even $3,000 annually for 5 years; that's $15,000 just like that. It comes in handy since medical emergencies tend to happen every 4-5 years give and take.
4. Some HSA providers let you invest your saved money into stocks and market equities which grow and yield dividends. Your money making money for you. $3,000 invested for 10 years at 7% return rate with yearly contributions of $3,000. Ending balance $47,350.80. Ding-Ding Ding. That's an increase of $14,350.80
5. If you save all your medical receipts toward the end and never claimed them while investing the money, it gives you one more gift. The HSA transforms into a regular IRA account (at age 65). After that, you can use the money for everything. You can theoretically offset years of expenses to the tune of $$$$ tax-free (for example). It's an incredible proposition. Think of it, if you had $150,000 to use tax-free to buy a rental property just like that.
6. This is why they call HSAs, the Triple tax advantage accounts. Don't believe me listen to the other folks listed below (I wrote this in 30 mins, trust but verify):

• HSA Accounts - How to Invest Them for Financial Independence (The Secret Early Retirement Account)
• My favorite, the Money Guy Show: "Health Savings Account Benefits: Triple Tax Advantage"

My takeaways: This plan is great starting at age 24. Once married, upgrade and if you are hit with a set back for medical emergencies, tap the fountain of greatness. As always if you don't understand it all after reading this once, just know I took me 4 years to kinda know how to explain it.

Have patience but get the HSA while you are learning.

For even more content such as this, stay connected with my Linktr.ee/GQ_accountant. You might also like A Man's Guide to Not Going Broke While Dating, Time to get your very own Linkedin Address, or The Seven Stages of Financial Freedom for Millennials. As always, share, like and definitely begin having the conversation about money before it is too late.