The Best Way to Use a Health Savings Account!

Transcript

Next up, we’ve got a question from Buff Lightyear. Buff, that’s for you. What a great username! What a great… I knew you would like that. But he’s also got a good question. It says, “Any tips on balancing choosing a high deductible health plan to be able to invest in an HSA, but then not wanting to use healthcare for elective checkups because of the out-of-pocket costs? I’m generally a healthy young guy.”

So when you’re thinking about different health insurance plans and investing in an HSA, and spending the out-of-pocket costs, how should he go about making that decision? Well, first, let’s discuss why is this an issue?

In my opinion (again, Brian’s not here to defend himself), I think that health savings accounts are the sexiest investment vehicle that exists in the financial realm. Because it’s like a Roth IRA, but it’s like a Roth IRA on steroids. Because you get a tax deduction on the front end, right? So if you were in the 4% of folks that do the triple tax advantage HSA, and by the way, did you know sometimes it’s quadruple tax advantaged if your employer allows you to do salary reductions into your HSA? You save on payroll tax too. So that’s a fourth tax savings. And you contribute and you get a front-end tax deduction, and maybe you get a payroll tax deduction as well. And you invest those dollars and not spend those dollars, they can actually grow tax-deferred through time. So you’re not paying tax on them while they’re growing. And then when you have medical expenses, you can then pull that money out for qualified medical expenses completely tax-free. So you get a tax break on the front end, sometimes two tax breaks on the front end, tax break while it grows, and then tax break while you pull it out. That’s why people get so excited about HSAs.

And if you’re a family plan right now in 2023, $750 is the limit. So it’s like you put more into an HSA than you put into a Roth IRA. So it’s a really great way to save for tax-free expenses. It’s actually why it’s number five on our Financial Order of Operations. Right? It’s why we focus on that being a tax-free account. If someone wants that, they go to money.com/resources. It’s free. Go grab it, moneyguy.com/resources.

So that’s why people love health savings accounts. In order to be able to take advantage of what I just described as the sexiest investment account in all investment account land, you have to be taking part in a high deductible health insurance plan. Well, high deductible means exactly what it sounds like. When you use that health insurance, your deductible is pretty high. So that means that you, as the member, as a participant, bear a lot of your health insurance costs.

Well, it’s not uncommon with large employers that you’ll have a number of different health insurance options available to you. You might have the deductible plan, but some plans, some companies provide really great Cadillac insurance, where it says, “Hey, if you’re under this plan and you’ve got to go to the doctor, a $10 copay.” You know, me and Brian talk about, you know, all of my kids, I’ve got a gaggle of them now. They’ve all been born under high deductible plans, and we hit our deductible, hit our out-of-pocket max. You’re talking about thousands upon thousands upon thousands of dollars that childbirth cost me and my wife. Brian, I think one of his kids, it cost him 10 bucks. It literally was they paid a co-pay because the type of insurance that the company was working for at the time. Crazy available. So while I love the fact that you can do a high deductible health plan and you can save in a health savings account, Cadillac insurance does exist. So don’t sacrifice the really good insurance option just in lieu of the high deductible plan.

So, Buff, here’s how you do your math. It’s pretty easy mathematics. You do a spreadsheet with three rows and two columns. You want to think about, one, what’s my monthly cost? What’s the premium cost for the high deductible plan? How much does the high deductible plan cost? How much does the other plan cost? Then you say, “Okay, based on the way that we use insurance,” you said, “Hey, I’m young and healthy. I don’t have very many visits. Maybe I get a cold once a year and I go to urgent care.” No, it’s $200 bucks. Okay, $200 bucks for urgent care on the high deductible plan, $10 office visit under the Cadillac plan. Then I factor in my tax savings from the HSA. I add up the difference of those three and I say, “Okay, which one’s more advantageous? Which one’s less advantageous?”

What you may find is that sometimes it switches. Sometimes a high deductible plan makes more sense, and then you get a bunch of tricycle motors. You’re going to the doctor all the time. Cadillac insurance is what makes more sense. So you have to make that decision to figure out which insurance should I go with. Young people, it’s really hard to shy away from high deductible plans because they’re less expensive on a monthly basis, and you get the tax savings. For more information, check out our free resources here.