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Not Too Late

Mike Zaccardi

HEALTH SAVINGS accounts are frequently praised on HumbleDollar—with good reason. A lesser-known benefit: Health savings accounts, or HSAs, can be a boon for new employees, thanks to the last-month rule.

What’s that? If you have a qualifying high deductible health plan (HDHP) as of Dec. 1, you’re eligible to make a full-year HSA contribution, even if you only just bought an HDHP. On top of that, if you continue HDHP coverage, you can make a full HSA contribution for the following year. The downside: You have to keep qualifying coverage for the next year or you could trigger taxes and penalties on the HSA contributions made under the last-month rule.

I took advantage of the last-month rule when I swapped from a contract job to a permanent role in 2013. Since then, I’ve made it a goal to always contribute up to the annual HSA maximum. With some decent stock market returns, my HSA has swelled to more than $50,000. My plan is to let the account grow over the decades and then reimburse myself when I’m a healthy old man (knock on wood).

Since first opening an HSA, the only major health-related expense I’ve incurred was an elective $3,300 Lasik procedure in 2018. I planned ahead and paid with a 2% cashback credit card, while leaving my HSA untapped. Fear not: I paid off my hefty credit card balance in full later that month.

Another tip: If you can, it’s best to contribute to an HSA through your employer’s payroll system. That way, you can avoid that pesky 7.65% payroll tax. An added bonus: Many employers match an employee’s HSA contributions.

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R Quinn
R Quinn
1 year ago

No doubting HSAs have their benefits, but that is if you are in an income bracket that allows you to use them and deal with a HDHP. Many middle and lower income folks are not in that position and the advent of HDHP have made life much harder for those folks also trying to save for retirement.

Jack Hannam
Jack Hannam
1 year ago
Reply to  R Quinn

The rules ought to be revised to allow anyone to open an HSA with its tax advantages, without the requirement of having a high deductible policy. Also, speaking of deductibles, it would be nice if medicare and private insurance companies would not use the calendar year, but instead, start the meter running on your birthday each year. This would lessen the rush for many to have certain procedures done in the final weeks of each year after having finally met their deductible limit for that year. I suppose the problem with this idea for insurance companies might be the people who change plans.

wtfwjtd
wtfwjtd
1 year ago

Yep. HSA funds can even be used to pay Medicare Part B premiums (though not Medigap premiums), making them an ideal way to create a tax-free fund for paying for Medicare after 65. And even if you don’t use the funds for this (or other medical expenses), you can withdraw your money exactly like a Traditional IRA, with NO RMD’s, ever. Win-win-win!

Andrew Forsythe
Andrew Forsythe
1 year ago

The tax benefits of HSAs are unmatched, especially, as you point out, if you invest the funds in the early years and let them grow, then withdraw them tax free down the road to reimburse the expenses. It does require keeping good records—for years—along with all those receipts for medical expenses incurred.

We’ve had our HSAs at HSA Bank and they’re OK, with a good investment option through TD Ameritrade, but they require $5000 to be kept in the bank account portion to avoid fees, which is a drawback. I’ve read a little about Lively, which appears to avoid those fees and minimums but I haven’t gotten around to making a switch yet. HSA Pricing | Lively (livelyme.com)

Richard L
Richard L
1 year ago

Morningstar evaluates HSA plans annually.
They recently published “The Best HSA Plans of 2021”.

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