Regarding HSAs - is it too good to be true?

[urologyisgreat]

Resident here, thinking about switching from traditional health insurance to HSA as I'm learning the benefits of the account. Currently, the yearly max contribution is $3400, and the deductible is $1300. Some technical questions:

1. Assuming I meet the deductible at some point in the year, and THEN have further health care costs - does the plan pay? Essentially, are you guaranteed to pocket the difference of the max contribution and deductible (3400-1300 = 2100) since the plan is then obligated to pay for costs (so as long as they are covered)?

2. As a resident, my top priority is to max out Roth IRA. My employer does not match residents in 403b. I am going to find out if they match HSA contributions. Should HSA be the next account to work on? (apologies, I realize this is more of an investing question but for the sake of continuity I've tied the ?s here)

Thanks!

[TotallyBroke]

I think you might be a little confused about HSAs.  Either that, or I didn't understand your questions.

First, read this: https://www.whitecoatinvestor.com/retirement-accounts/the-stealth-ira/

1. HSAs are a way for you to pay your health care costs using pre-tax dollars.  It is not a substitute for health insurance.  You only qualify for an HSA if you have a high deductible health insurance plan.

For most high-income earners, the recommendation would be to maximize HSA contributions every year and pay for all deductibles & co-pays with after tax money, but keep the receipts.  Then, when you go to retire (or you need the money for any other purpose), after your HSA contributions have compounded over time, you pull out those receipts and say, "I paid $X in health care costs and I'm taking that money out now (several years after paying those health care costs) tax free."  You can then use that money however you want.

Alternatively, you can pull out any HSA money you want, show nobody any receipts and pay a penalty (I think it is 10%) and blow the money on whatever you want.  The benefit is that it wasn't taxed when you were in a higher marginal tax bracket and it has grown tax free over the years.

2. Yes, maximize your Roth IRA contributions as a resident (and for your spouse, if married).  Again, you only have access to an HSA if you have a high-deductible health insurance plan (which I don't think most residents have).

[DMFA]

TotallyBroke wrote:

Alternatively, you can pull out any HSA money you want, show nobody any receipts and pay a penalty (I think it is 10%) and blow the money on whatever you want.  The benefit is that it wasn’t taxed when you were in a higher marginal tax bracket and it has grown tax free over the years.

Click to expand...

It's taxed as income plus 10% penalty if withdrawn prior to retirement and not for healthcare.  If it's in retirement, but not for healthcare, then it's just taxed as income as though it were a 401(k) or trad IRA, hence the term "stealth IRA."

An HSA is just a brokerage account.  It's just a place to store money which can be used on healthcare.  It's tax-deductible on contribution, grows tax-deferred, and can be withdrawn tax-free if used for healthcare.  Its best use is for healthcare in retirement, but can be used like a traditional IRA.  You invest it in funds just like any other brokerage account like a 401(k), IRA, etc.  You can contribute up to $3,400 to it per year (if single).

To be eligible for HSA contributions, you have to have a high-deductible health plan (HDHP) defined by a deductible of at least $1,300 and an out-of-pocket max of no more than $6,650 (if single), and zero benefits (other than preventive care) before meeting the deductible.   After the deductible, it's often something like 80% coinsurance, meaning you're still on the hook for 20% of the cost, up to your out-of-pocket maximum (aka catastrophic cap) of no more than $6,650.

So, now to answer the OP's questions:

1. No.  Ideally you would only have preventive visits and spend nothing in healthcare, spending only your insurance premiums on healthcare and investing $3,400 per year in your HSA.  Further, any healthcare costs you'd incur, you'd probably be better off using regular (post-tax) dollars and leaving your pre-tax dollars in the account for compound gains over time.  This is especially true for your low tax bracket since using pre-tax dollars would probably only net you a 15% discount.  Plus, once you meet the deductible, you're still on the hook for some of the costs (usually 20%) until you hit your OOP max.  For *most* healthy people, a HDHP and making HSA contributions are superior to a PPO.  Your mileage may vary.

2. I'd prob still do Roth IRA first, but you'd be right to try to get any HSA money you can.  If the HDHP and HSA are through them, then they can contribute directly to your HSA, which should also lower your payroll taxes (SS/MCR).

[urologyisgreat]

I think I'm processing all of it. Just to be sure - under the HDHP/HSA, I would be able to pay for the expenses under the deductible amount with the money in the HSA account, correct? Silly question almost, but I want to make sure the HSA money is not reserved only for the OOP expenses under the OOP limit. Thanks again!

[adventure]

urologyisgreat wrote:

I think I’m processing all of it. Just to be sure – under the HDHP/HSA, I would be able to pay for the expenses under the deductible amount with the money in the HSA account, correct? Silly question almost, but I want to make sure the HSA money is not reserved only for the OOP expenses under the OOP limit. Thanks again!

Click to expand...

Right. For example, I just had an office visit with my PCP. Or my spouses glasses. Or a prescription we have to pick up. You can usually pay with a silly debit/credit card they'll send you that drafts directly from the account, or you can just pay your own way, then log into your account and send $100 (or whatever the costs were) to your bank account. I'll pay for it with the HSA funds, or from my cash/creditcard and not the HSA - at least not today.

Then let the HSA grow as an investment account in low cost index funds over time, I'll save the receipt, then take the cash out someday after it's grown tax free).

[RogueDadMD]

This link has my blog post w/my thoughts on HDHPs and HSAs.

http://www.roguedadmd.com/2017/06/high-on-high-deductibles/

There's also a basic math equation you need to evaluate, comparing the premiums as well as deductibles/OOP costs of whatever plans are available to you to ensure you are making the right financial decision.

I've done a mix of using HSA money to pay costs (before deductible was met) when money was tight, but otherwise have tried to let it sit and grow in our HSA investment account.  If you don't have the cash flow to pay costs out of pocket, that also needs to figure into your math. The HSA can definitely be used to pay your initial costs before meeting the deductible, and sometimes that IS the right decision.  As it is now I have enough cash flow to pay things out of pocket and am trying not to touch my HSA at all, but the last 2 years we hit the out-of-pocket max, and this year we're almost to our deductible again (admittedly a LOW one compared to most HDHPs).

With my wife having just gone part time, I may have to use some HSA money earlier than planned, but between the HSA cash account and investment account I have 3 or 4 years of expenses covered right now.

[The White Coat Investor]

First decide if an HDHP is right for you and your family. Then if it is, make sure you use an HSA.