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Health Saving Account / HSA Rules and Information UPDATED for 2022!

Is a Health Savings Account a good option for you?
And if you have one, are you maximizing the benefits of it?

In this article, I’m going to cover the positives and negatives of HSA’s. And then I will reveal the biggest mistake that 95% of HSA owners make. And finally, I’ll share my own personal strategy in how to supercharge one of the best features of an HSA. Hi my name is Kevin and that was me from my second article on my website in early 2020, so forgive me for coming across a little awkward.

Anyways, now that everyone is looking into their healthcare options for the upcoming year, I thought I would edit and update some of the information that is specific for 2022, and add some extra information, tips, and resources that really help you see the benefits of HSA’s and how to get the most out of them. As this site focuses on financial wellness, you’ll learn how an HSA is not just a way to manage your healthcare, but how it can be another tool for growing your wealth…if you use it the right way. And I’m going to show you how to do that…so stay tuned!

If you’re wondering what an HSA is, let’s first talk about what it isn’t. Many people confuse an HSA with a Flexible Spending Account, or FSA, which is an account run by your employer where you can put aside pre-taxed money for healthcare expenses with the understanding that you have to use that money for that year—it’s a use it or lose it account and there can be a lot of headaches with this inaccurately planning how much expenses you will incur in an upcoming year.

A Health Savings Account is very different in that you actually own the account and can take the money with you if you leave your job. Also, it’s not a use it or loses it account—your money can roll over from year to year without any penalty. And another exciting difference between an FSA and an HSA is that you can invest the money of your HSA, which is not an option for an FSA; we’ll be talking much more about this in a little bit.

Now, if you’re considering signing up for an HSA, you also have to sign up for a qualifying high deductible healthcare plan to be eligible. Update time! For 2022, the minimum deductible for a high deductible healthcare plan to be HSA-eligible is $1,400 for an individual, or self-only coverage, and $2,800 for a family plan, so that did not change from 2021.

However, another criterion to be eligible is the out-of-pocket maximum for an HSA-qualified health plan, and that did change: for 2022, it cannot be more than $7,050 for individual coverage or $14,100 for family coverage. When signing up for a plan, an insurer will generally let you know if it’s HSA-eligible, if they don’t, you will want to contact them directly to check into that.

So why would you want to sign up for a high deductible plan?

—well, there are some good reasons. If you are relatively healthy and don’t typically have a lot of medical expenses, then a high deductible plan might be a great option for you because your premiums are often significantly less than lower deductible plans. Also, many employers will put some money into your account for you—so that’s basically free money given to you, just like if your employer puts a match into a 401k for you.

Now on the other hand, if you don’t like high deductibles, you plan to receive a higher amount of medical services, or don’t have money set aside for unexpected medical expenses…then an HSA may not be for you. But I would challenge you to look at the difference in the cost of your premiums over the year and you may be surprised at how much the low deductible plans actually cost.

When I was looking at my options last year, my company’s low deductible plan would cost me about $180 every 2 weeks out of my paycheck or $4,680 over the course of the year whereas the High deductible plan cost me about $50 every 2 weeks or $1300 for the year. So, over the course of the year, I would pay almost $3,400 more out of my paycheck for the low deductible plan.

However, by signing up for the HSA, my company also put $500 into my account so I really came out almost $4000 better and, since I had low medical needs, I came out way ahead on an HSA. While many people open an HSA on their own, a lot of others start in an HSA by opening one from a provider that their employer uses; I did too; After all, it’s super convenient. However, as I learned more about HSAs, that convenience can come at a cost, and I realized that the HSA provider my company used had a lot of fees associated with them, some clear and some not so clear.

When I really started to analyze this and looked at the math, I realized that the fees were more than I ever thought, so last year, I actually moved my HSA to another provider. So I would say if you are looking to open a new HSA on your own by choosing your own personal HSA company or provider, take a look at the fees; if you’re not liking what they are, I do have a separate article where I share what to look for and even tell you the company that I chose for myself and give you the reasons why.

Because this article is meant more as an introduction to health savings accounts, I’m not going to add all of that detailed information here, but I will have that other article linked for you in the description if you’re interested in learning more.

Health

Okay, now, the exciting part about HSAs is the ability to invest the money in your account—and all of the tax benefits that go with this. You may have heard people talk about the triple tax benefits of HSAs and you start to realize that they are not just for your health, but also can help create wealth—2 of the major things this channel is about! So, let’s go over the 3 tax benefits: One, the contributions you make to the account are tax-free.

Two, any withdrawals you make for qualified health expenses are not taxed. And number three, any money invested in the account grows tax-free. This last part is super exciting because of the implications—and notable because about 95% of HSA accounts have no investments, which means that there is no opportunity for the money to significantly grow. You can receive interest in the account, but we know how low-interest rates are now and how little that will produce.

So, to clarify, 95% of people are only using their HSA to pay for health expenses completely tax-free—and that’s not a bad thing. And if it’s difficult to put much more money into your account because of other life expenses, then that’s what you have to do.

In this case, I would recommend that you at least contribute enough money into your account that covers the deductible on your plan so that you’re not left with the stress of having to pay a lot of money for unexpected medical expenses. Now…if you have the ability to put a little extra money into your account, I want you to start thinking of how your HSA can not only become a place to hold tax-free money for medical expenses but as a place to grow money tax-free that can help you big-time in retirement. And I would say that if you’re someone that is actively planning for retirement, an HSA should be something you absolutely consider.

I would even argue that it could be a wiser decision to fully fund your HSA before an IRA…or even a 401k above any money you have to put into to get your full employer match…you always want to get that full match of free money when you can. Does this sound crazy?? Well, let me tell you why it’s not. Because let’s say you put money in your HSA and never need to take out any withdrawals for healthcare expenses.

Well, when you turn 65, then your HSA becomes effectively like an IRA where you can take the money out penalty-free for any reasons when it will then be taxed at your current income tax rate—UNLESS—it’s for Healthcare expenses—which then you can withdraw tax-free! And over the years, because your money was invested, it actually has grown to be more than what you originally put into the account.

Okay–now I’ll share with you my ultimate strategy that is good for anyone that does not absolutely need to use their HSA to pay for expenses at that time you incur them and just requires a few organizational skills. And that is, for co-pays or small medical costs, I just pay out of my pocket and don’t make a withdrawal from my HSA, again only because I don’t absolutely need to get reimbursed at the time.

But I keep the receipts in a folder labeled unreimbursed medical expenses—and keep in mind that they do have to be for dates after I established my HSA. And this is where it’s great—so the money I don’t take out for the healthcare expense, I let it grow by investing it in my HSA—with annualized returns of about 7% compounded year over year.

And then once I retire or if I find myself out of work, I can get withdrawals from my HSA using my old unreimbursed healthcare receipts—and those receipts can be from 20 years ago! This is another great benefit of an HSA that I find many people that have them don’t realize–you don’t have to pull money out of your HSA to get reimbursed for medical expenses in the same year that you incurred the expense.

And in this way, I can maximize all 3 of the major tax benefits of HSAs, which again, 95% of people with HSAs don’t do! If the investment part of the HSA is something you’re really interested in and want to learn more about, I do want to let you know that I have another article that looks how 3 different scenarios of how someone could use an HSA and how their choices affect the account’s performance over 20 years.

If you’re curious to see actual numbers on how someone that invests their HSA does compare to the people that don’t invest their funds over 20 years, I think you might be surprised to see an over 80,000 dollar gain of wealth and then you’ll understand why I’m personally someone who is all in on investing within my HSA.

Check out that article for the details. So anyway, now, you’re thinking maybe an HSA is for you, right? Well let me first share with you the HSA contribution limits that are set annually by the IRS: for 2022, you can now contribute up to $3,650 for individual coverage and $7,300 for a family.

Keep in mind, that if your employer puts in money for you, then that counts against the limit—so for example, if your employer puts $650 into your account for the year, then you can only put in $3,000 to reach the max contribution for self-only coverage. Another thing to be aware of is that you have up to the tax filing deadline to add money to your account up to the contribution limit. So, for 2022, you’ll have up to April 15th, 2023 to fully fund your HSA.

Now if you’re watching this before the 2021 tax year filing deadline of April 15th, 2022, and hadn’t fully funded your HSA, you can still fund up to the maximum contribution limits for 2021, which are a little lower…$3600 for individual coverage and $7200 for family coverage. Also, continuing from last year: If you’re age 55 or older, you can save an extra $1,000 each year to play catch-up.

With these annual limits, an HSA could never replace an IRA or a 401k, but could definitely play a role in your retirement planning. Now a lot of this sounds really good, but there are some things that you have to keep in mind when making this decision—the negatives. One big thing to keep in mind is if you would ever need to pull money out of an HSA before you are 65 years old and that money is not used for healthcare expenses, you would face a 20% penalty plus any taxes that may be due.

The other major thing to remember, just like any investment, there are no guarantees that you will have positive returns and could even lose money—however, history shows us that investments over time greatly outpace interest earned in savings accounts and inflation.

So if you have a weak stomach when the market has a downturn, which as we know happens, then the investment part of an HSA may not be for you, although, keep in mind that you will likely have a lot of options within your HSA brokerage account that are less risky. Now one of the positives to come out of the pandemic were some permanent improvements to HSA’s that were enacted from the CARES Act, so let’s talk about those next.

The first of these 2 permanent improvements is that over-the-counter (OTC) medications are now covered for tax savings reimbursement without a prescription from your doctor. So, if you need to get something for a headache or cough, or allergies, you can get these reimbursed from your accounts without having to go to the doctor to get a prescription.

The second permanent improvement is that, for the first time ever, female hygiene products are now eligible for reimbursement on a pretax basis through any of these accounts. So, I think you can see which half of our audience is really going to like this benefit. Ladies, I’m sure you’re thinking, “it’s about time!” Now as a guy, I can’t…and won’t…claim to know a lot about female hygiene products and how much they cost over the course of a year,

but I can say that anytime you buy something with money that wasn’t taxed from your paycheck, you’ve already saved at least whatever your effective income tax rate is, and let’s say that’s 14.6% which is what the average person paid in some of the most recent data I‘ve seen…so that’s pretty good! I hope you can see why I’m such a big fan of HSAs. Because there are some occasional changes to them, like what happened with CARES Act or just the basic annual limit changes,

I cover those in the additional articles so definitely consider a visit to the site if you want to stay updated. One more article I’m going to recommend right now is, that if you’re unsure of possible changes to your HSA eligibility during the year, where you think you might have to change to a non-HSA eligible health insurance plan in the middle of the year because maybe a job change or something, there are some potential landmines there, so I have an article that talks about how to avoid any possible tax penalties; again, I’ll have this in the site.

I know I’ve mentioned quite a few other article resources and if you’re unsure about missing any of these articles, I also have a dedicated HSA playlist you can check out where you can then just watch the article that are most important to you.

Anyway, I hope you have found this information helpful, and if you did, please visit my site and share it with anyone that you think could benefit from the information. And please let me know any thoughts or questions you have in the comments, that way we can all learn from each other on how to take little, easy steps in making big improvements in our lives.

And if you’re interested in seeing some of my non-financial-type articles, I hope you check out my new, second site, How to with Kevin where I share my experiences of other things I’ve learned to tackle…or things that come up that I figure out, and I bring you along with me. Thanks so much and until next time, have a great day!

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