HSAs – Part 2: Bang for your Buck

by Andrew D. Schwartz, CPA

In my last post, we covered some basics with insurance and Health Savings Accounts (HSAs).  Let’s continue by reviewing some more key strategies you can do to minimize your healthcare costs and save taxes:

The Winning Combination

As health insurance costs continue to skyrocket, Health Savings Accounts (HSAs) provide you with a great opportunity. Assuming you and your family are relatively healthy, and you won’t choose to routinely forgo your annual physical to save a few hundred dollars in medical bills, start by switching to a high-deductible health insurance product. You will immediately realize a sizeable decrease in your monthly premium – generally equivalent to the increase in your annual deductible.

Next, open up and fully fund an HSA for the year. Don’t forget to deduct your HSA contributions on your tax return that year.

Assuming you and your family have a relatively healthy year, you will end up ahead of the game, since you get to keep all the money leftover in your HSA at the end of the year.

What happens if you incur substantial healthcare costs during the year? Yes, you will probably deplete your HSA. But once you spend the full amount of your annual deductible, your insurance takes over like insurance is supposed to do and protects you against any further financial hardship.

Bang For Your Buck

Are you ready for some more good news about HSAs? When these tax-advantaged healthcare savings accounts were first introduced back in 2004, the amount you could contribute into an HSA each year was a function of your annual deductible.

A few years ago, the rules were changed to make HSAs more attractive. For families, as long as your annual deductible is at least $2,400 (in 2012), you can contribute up to $6,250 into your HSA. Single individuals with a health insurance deductible of at least $1,200 in 2012 are eligible to deposit $3,100 into an HSA this year. Anyone 55 or older can contribute an extra $1,000 into an HSA this year.

What this new rule means to you is that you can put away almost triple your annual deductible. So even if you tap into your HSA to pay 100% of your deductible, you still have a decent amount of money left over growing tax-deferred to pay for future healthcare costs or to eventually help fund your retirement.

Survival of the Frugalist

Why not let your health insurance do it’s job and protect you and your family against the catastrophic? Then, couple this less expensive insurance with pre-tax contributions into an HSA, and you have discovered one strategy to minimize the after-tax cost of your family’s healthcare costs in today’s market.

For more information about HSAs (and some good bedtime reading), check out IRS Publication 969.