The latter part of October is usually the time of year when employers kick off their annual open enrollment. During this two- or three-week timespan, employees have the opportunity to sign up for various healthcare options, insurances, a flexible spending account (FSA) or health savings account (HSA). To take advantage of the HSA, you must be enrolled in a high deductible health plan (HDHP). There are many benefits of utilizing a health savings account:
Triple tax savings – Contributions, earnings, and qualified healthcare expenses are not subject to federal income tax or state income tax in most states. The maximum HSA contribution for 2021 has increased to $3,600 for single coverage and $7,200 for family. If you are age 55 or older during 2021, you may contribute an additional $1,000.
Interest and investment benefits – You can earn interest each month and have the option to invest in mutual fund families once minimum balance requirements are met. Before selecting your investment options, be sure to consult a fee-only advisor.
Portability – Because you own the HSA, you can take it with you if you change jobs, change health plans or retire.
Rollover – Whatever balance is left in your account at the end of the year, rolls over to the next year. There is no use it or lose it feature.
Age 65 comes with a perk – After reaching age 65, you can also use the money in your HSA for any non-eligible expense, penalty free. However, you will have to pay income taxes on that amount.
Wealth building hack – If you can pay for the expenses (save your receipts) you would usually bill to your HSA account from regular cash flow, this will allow your pre-tax contributions to continue growing at a faster rate. Years down the road, hopefully after your account has grown substantially, you can get reimbursed for the qualifying medical expenses you paid out of pocket.
If you have other medical coverage, you are not eligible to contribute to an HSA (e.g., Medicare or secondary coverage under your spouse’s plan if that plan is not a qualifying HDHP). If you and your spouse are enrolled in an HDHP with an HSA, be sure to monitor your contributions so you do not exceed the family maximum allowable contribution.
Open enrollment is also a good time to determine what your savings goal will be for 2021 and plan accordingly. Additionally, give some thought to securing a revised quote for your homeowners, auto, and liability insurances. You should qualify for an additional discount if you bundle. Instead of the set it and forget it mentality, an annual or bi-annual price check will help determine if you are overspending.
