Health insurance premiums are rising. A good way to ease that burden is by adopting a high deductible plan, where you in effect trade larger out-of-pocket costs for medical bills for lower premiums.
The plans are part of the continued evolution in healthcare to make consumers better weigh costs against benefits. According to federal regulations, for individuals, the deductible needs to be at least $1,250 for individuals, and $2,500 for a family. The maximum deductibles for these plans may go as high as $6,250 for individuals, and $12,500 for families. So watch out if you have a less than healthy year your liability could exceed these amounts with other out-of-pocket costs.
Aside from lower premiums, another advantage is the government recently created savings plans that permit investing your dollars in a savings plan to cover healthcare costs in the future. So, you may be able to cut your costs, transfer the difference to a healthcare savings account, and come out ahead if you or your loved ones don’t fall ill.
But the real opportunity lies for those who are not only generally healthy, but also have the resources to aggressively fund these accounts. The annual 2013 HSA maximums are $3,250 for individuals, and $6,450 for families.
An HSA is like a traditional individual retirement account or 401(k): Your contributions are tax-deductible. Also, like a Roth IRA, withdrawals made for healthcare expenses are tax-free.
Fidelity Investments recently published an estimate that a 65-year-old couple will spend about $240,000 out of pocket for healthcare costs in retirement. Finding something to spend the HSA money on probably won’t be a problem.
This is the only double tax-free account I’m aware of where the government doesn’t get some tax income. It’s designed intentionally to foster responsible healthcare decisions. Unfortunately, most won’t be able to maximize it because they don’t have enough money left over after meeting basic needs.
Here is a very simplistic example of $5,000 invested annually in an HSA versus other investment vehicles over 20 years at 7% for a couple in the 40% marginal tax bracket – state and federal. (Your specific situation requires specific analysis on how it would likely work for you, in light of changing tax brackets over time and other factors.) The Roth money contributed is after the tax bite.
While the HSA and the Roth end up with the same amount of money, you have to put in more money with the Roth because you must pay taxes on its before it can grow in the account. The HSA’s growth rate is better.
Note that until you reach 65, there is a 20% HSA withdrawal penalty on top of income taxes for nonmedical expenses. After 65, the penalty goes away but for nonmedical expenses you would own income tax. Current Medicare recipients do not qualify to contribute to these plans, but may use established accounts for out-of-pocket costs.
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Tom Gartner is a financial advisor with ISC Financial Advisors in Minneapolis.
This article represents opinions of the author and not those of his firm and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.
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