A Health Savings Account (HSA) could be a game-changer for You and Yours – so kindly pay attention.
Benefits of HSAs are hard to deny. Admittedly, I missed the boat on this for quite some time during my federal career. And it cost me tens of thousands, if not hundreds of thousands of dollars. I implore the families that I serve to learn from both my successes and my failures. This one falls into the latter category unfortunately. I have one now. But you can’t ever completely make up for lost time. Such is life for me. However, it’s a good reason for you to consider one today.
As a Federal Agent and Financial Advisor, I’ve seen firsthand how Health Savings Accounts (HSAs) can be a game-changer for federal employees. A friend who will take the time to walk you through this high-powered account is worth their weight in gold. And then some. You will – potentially – have the ability to far out earn whatever you’re paying your Advisor by having them help you with this one account. Think of these as essentially “Medical IRAs”. Let’s dive into why every Federal Agent should at least consider incorporating the HSA into their financial strategy.
The Power of Triple Tax Advantages
HSAs offer a unique triple tax benefit that sets them apart from other savings vehicles:
- Contributions are tax-deductible, reducing your taxable income.
- The money grows tax-deferred or tax-free within the account.
- Withdrawals for qualified medical expenses are tax-free.
This trifecta of tax advantages makes HSAs an incredibly formidable tool for both short-term medical expenses and long-term savings.
Flexibility and Portability
One of the most attractive benefits of HSAs are their flexibility:
- Funds roll over year to year, unlike Flexible Spending Accounts (FSAs).
- The account is yours to keep, even if you change jobs or retire.
- You can use the funds for a wide range of qualified medical expenses, including deductibles, copayments, and coinsurance.
Lower Premiums, Higher Savings
High Deductible Health Plans (HDHPs), which are required to be eligible for an HSA, often come with lower premiums. This means you can redirect the money saved on premiums into your HSA, effectively building a medical expense nest egg while potentially lowering your overall healthcare costs.
Investment Potential
Many HSAs allow you to invest your funds, potentially growing your savings over time. This feature can be particularly beneficial for Federal Agents who are in good health and don’t need to use their HSA funds immediately. By investing wisely, you could build a substantial healthcare fund for your future. In fact, if you have a robust amount of cash available (look at your Liquid Term on your Financial Scorecard), here’s a great MoneyArmor™ Move:
➡️ Set up the HSA, but continue to cash flow (i.e., pay out of pocket) all of the medical expenses that you can afford. In this way, you’re essentially paying for current medical expenses out of your current budget AND saving into the HSA investments. This allows you to build that HSA investment account (remember, it’s building up without you paying taxes on it each year) and have a nice nest egg to pay for medical care when you’ll likely need it the most – in RETIREMENT – which will also be tax-free if you use it to pay for qualified medical expenses.
Employer-Like Contributions
As a federal employee, you may receive contributions to your HSA from your health plan. It’s called a “premium pass through” and it comes from the plan and passes right into your account as a deposit to your HSA each month. It’s similar to employer matching contributions associated with your TSP or 401(k). This is essentially free money that can help boost your healthcare savings!
Let’s look at a Family example below – straight from an OPM health plan brochure for 2024. Page 15 of this HDHP shows you how much you are receiving as a “premium pass through” each month. Thus, this is the amount deposited directly into your HSA.
But wait, what are the total contribution limits to the HSA for 2024?
Individuals: $4,150 for the year
Family: $8,300 for year
If so, then why does the second bullet point above list a different total contribution amount (i.e., $6,700)?
You must take into consideration the “premium pass through”. In other words, the pass through amount counts as part of your annual contribution. It looks like this in our Family example (ignore rounding for simplicity):
Total Contribution Limit for 2024 for Family = $8,300
Less: Premium Pass Through ($133.34 x 12 months) = ($1,600)
Equals: Amount left that you can contribute = $6,700
So if you wish, you can contribute $6,700 for the YEAR,
OR $558 per MONTH for 12 months,
OR $257 per Pay Period (assuming 26 Periods that perfectly fall within the calendar year).
Retirement Strategy
As mentioned, the benefits of HSAs can play a crucial role in your retirement planning:
- After age 65, you can withdraw funds for non-medical expenses without penalty (though you’ll pay income tax on these withdrawals – but don’t let this scare you off. If you’re a regular read of ours, you know we don’t let the tax-tail wag the dog).
- There are no required minimum distributions (RMDs) for HSAs, unlike 401(k)s and Traditional IRAs.
- HSAs can help offset the significant healthcare costs you may face in retirement. Using the funds for qualified medical expenses means the money comes out tax and penalty free.
Maximizing Your HSA Benefits
To make the most of your HSA:
- Contribute the maximum amount allowed each year, as your personal budget allows.
- Cash flow as much of your current medical expenses as you can afford, and consider saving some funds for future healthcare needs.
- Take advantage of investment options within your HSA to potentially grow your savings over time.
- Keep good records of your medical expenses, as you can reimburse yourself tax-free from your HSA at any time for qualified expenses incurred after the account was established.
As Federal Agents, we often face unique challenges and stressors in our line of work. HSAs can provide not only financial benefits but also peace of mind, knowing that you have a dedicated fund for healthcare expenses. Yes, there are a few HSA disadvantages. But nothing you can’t overcome. By incorporating the HSA into your financial strategy, you’re armoring-up and taking a proactive step towards securing your financial health, both now and in the future.
Remember, while HSAs offer significant advantages, they’re not the right choice for everyone. Consider your health needs, financial situation, and long-term goals when deciding if a HSA is right for you. As always, it’s wise to consult with a trusted Financial Advisor to determine the best strategy for your individual circumstances. You’ve got this!
Be the Hero for You and Yours!
