In this episode, Jim speaks with financial advisor Marc Bautis about the costs, benefits, and other considerations around Health Savings Accounts. Check out Frugal Living on Apple Podcasts, Spotify, Google Podcasts, Amazon, Anchor.fm, iHeartRadio, or anywhere you go to find podcasts.
What’s the most under-appreciated savings vehicle for working Americans? Consider the Health Savings Account (HSA). Though widely available, many workers completely ignore this tax-advantaged account. This week, host Jim Markus talks with Marc Bautis about these often-overlooked financial tools.
Bautis first appeared in our episodes What can you learn from a financial advisor (part one and part two). He’s the host of the Agent of Wealth podcast and a financial advisor at Bautis Financial. This episode covers the basics behind Health Savings Accounts.
This episode was sponsored by Aosom. Check them out for discounts on patio furniture, office furniture, toys, and more.
Read a Transcript From This Episode
This is Frugal Living. We’ve talked about health savings accounts, HSAs, in previous episodes. But we’ve never really dug into the topic before today. I love these things. And I think they’re underutilized. Maybe people just don’t like talking about health insurance. The goal of today’s episode: let’s change that. I’m excited to talk about health savings accounts and the types of insurance you need to have in order to get one.
Joining me today is Marc Bautis. He’s been on the podcast before. He’s an expert at this. He’s a financial advisor at Bautis Financial. You’ll recognize his name in the name of that company. And he’s also the host of the Agent of Wealth podcast. I’m excited for this conversation. I hope you are too. And if you have any other questions that we don’t discuss, please reach out. You can find us at Frugal.fm. What is an HSA?
It’s a tax-advantaged account. It works in conjunction with an HSA-eligible health plan. We’ll talk a little bit about that in a second of what makes a health insurance plan HSA eligible. But the real question is, “Well, why would anyone care? Why would someone be interested in this?” It’s really the tax benefits that come along with an HSA.
And, you know, whenever I talk to someone, and I’ll use the analogy of retirement. Someone will come and they’ll say, “Well, should I save in a pre-tax retirement account or should I save in a Roth type of retirement account?” And really what it is is you get tax benefits on either side. On the traditional tax IRA or 401k, the year that you add money to it, you get to take a deduction of that on your tax return. But when you retire and when you start taking money out, you actually have to pay tax on that.
And then conversely, the Roth IRA is the complete opposite. So you don’t get any tax break up front. This is after-tax money. It goes into a Roth account. But you never have to pay tax on that again, assuming you take it out when you retire.
So it’s often a question of, “Well, should I get the instant gratification? Should I get the tax benefit up front? Or should I wait ’til the end?” It’s left to the person to really, kind of, decide which one. And sometimes it makes sense to do a little of both. Well, the HSA takes it one step further. You get the tax benefit up front and you get the tax benefit at the end.
So there’s very few financial–in this case, it’s a health savings account, but it still falls under the financial umbrella–where you get the triple tax benefits. So that’s the reason why someone should really be interested or someone should really see if it fits is because the tax benefits are unlike just about any other financial product that are out there.
Is it true that there’s a way to access HSA money after a certain point for nonmedical reasons?
Well, the answer is yes, you can access it. But what happens is if it’s used for non-medical purposes, you lose some of those tax benefits. And, dependent upon when you actually use it or how old you are when you use it, there could potentially be a penalty on top of that.
This is the IRS saying, “We’re gonna allow you to save in this tax-advantage account, but we want you to use it for medical expenses.” It goes back to, you know, the government, or the IRS in this case, they will sometimes, kind of, push people towards what they deem good behavior. And they do that by offering different tax incentives. Like, retirement plans are an example. There’s some tax benefits to real estate where they promote, basically, owning real estate by issuing different tax incentives to do that. Like, education or 529 is another example where they wanna promote people saving or going to, to secondary education. They do that by issuing tax benefits on different types of college saving plans.
This is just another example where they wanna promote people having money to be able to pay medical expenses. And an HSA is, is a type of account where they offer that tax advantage ability on it. But they say, “If you’re not gonna use it for that, we’re taking the tax advantage off.”
That makes sense. And when you say triple tax advantage, obviously it means you’re not paying up front and you’re not paying at the end. What’s this third?
It’s the middle. So it’s the tax deferred. Let’s say you do save money for medical expenses in a non-HSA or just a regular type of account. What’s gonna happen is, and dependent upon if you have it in a savings account or even in some kind of investment account, every year you’re gonna get a 1099 from that account. And it’s gonna show, did your account earn any interest? Did it earn any income, dividends, capital gains? And what’s gonna happen is that’s gonna be part of your tax return and you’re gonna owe tax on that. The way an HSA works is you get the tax benefit up front. So you get that tax deduction up front. You don’t have to pay tax on any growth in that account.
And we’ll talk a little bit about that as well. And that’s the second benefit. And then the third tax benefit is, like we mentioned, you don’t have to pay tax when the money comes out. Not at the end, it’s whenever that money comes out for whatever. You know, as long as it’s for a qualified medical expense, you don’t have to pay tax on it again. So that’s how you get to the three tax benefits of it.
And I think that’s super important, ’cause I think we do forget sometimes when someone hasn’t looked into 401ks or retirement plans at all. And you’re thinking, “Hey, I’m doing a really good job saving. I’m even investing. I have my own, you know, brokerage account.”
Especially if it’s your first year and you haven’t gotten that first tax bill on… You know, realizing that you’re gonna be paying taxes every year on everything you just mentioned. As your money grows or as your investments pay you out on dividends, you pay taxes on that every time that happens. And that’s not the case with retirement.
Correct. And some people will ask. They’re like, “I’m getting the tax benefit up front, but I’m–have to pay tax on the end. Why even bother?” And part of that reason is the tax deferability. Because of compounding, and you’re not having to pay tax every year, the growth inside that–you know, whether it’s a retirement account or an HSA account–it will grow quicker than if you do pay the tax every year.
Even take into account that on the retirement account you’re paying tax at the end. So there is a benefit to it and, you know, you can even calculate what that benefit is, you know, using different calculators. But yeah, it’s a third benefit and should be considered.
Obviously there’s a maximum you can contribute to a 401k. That changes usually every year. That, you know, will depend on what the government says you can put into your 401k. But you can’t put in, you know, 50 grand. You’re 20 years old. The same applies to an HSA. And it’s a different level. It’s a much lower amount.
That’s correct. So, and it depends on whether you have individual coverage in your plan or if it’s part of a family plan. The maximum an individual can put into an HSA each year for 2022, it’s 3,650. If they’re part of a family, it doubles to 7,300. If you’re older than 55 and a half, it’s the same type of, like, catch-up contribution that is on the retirement side. So you can add an extra thousand dollars to your HSA if you’re over that age. So yes, it is lower.
And there’s different strategies involved with utilizing the HSA. And one of the things that happens a lot too is employers are HSA friendly. So a lot of times they will contribute to the HSA on your behalf. So that’s another thing to consider when you’re evaluating–Should I do the HSA plan? Should I do the regular type of plan?–is if the employer is making a contribution on your behalf. And a lot of times they incentivize you to go with the HSA by making a contribution to the plan that, you know, itself.
We’ve talked about this before the last time you were on. I always wanna question motives. You mentioned, well, the government is encouraging us to invest in healthcare because we know we have incredibly expensive healthcare costs in this country. And this is one way we’re incentivizing people to save for their own health plans with an HSA. One thing that you mentioned too, is the fact that there are limits to how much you can contribute to an HSA should be a signifier of how powerful these things can be.
My ears perk up as a frugal person. When someone says you can’t contribute more than 5,600 to this kind of account in a given year, my years perk up. And I think, “Okay, well I should probably try to hit that.” If they’re saying you can’t do more, it’s probably because the smartest among us would absolutely do more if we could because it’s, you’re not paying taxes before, during, or after. Is that fair?
Yeah. And we’ll even look at it from two ways and they’re, they’re sort of, like, competing ways. The first is, what you’re saying, is they put a limit on it. So that probably means that it’s definitely a good thing that if there was no limit, people would pump a lot of money into these HSAs ’cause, like we mentioned, there is a big tax benefit. The other thing I mentioned earlier was employers contributing on behalf of employees. So now a lot of times that perks people’s ears up too. And they say, “Well, wait a minute. If the employer is trying to incentivize me to doing this, maybe it’s not such a good thing.
And maybe it’s actually better that I go with the other type of plan.” And I see this come up a lot, just to use a correlation, is with pension buyouts. So people get an offer from a company and they’ll say, they’ll look at it, and they’ll say, “Well, the company offered me this lump sum to get outta the pension. And if they’re, they’re offering me a lump sum, that probably means it’s better to stay in the pension because they’re incentivized by what’s best for the company. And if they’re offer, making an offer for this, it’s probably not in my best interest to do that.”
HSAs are a little bit similar. However, you have to consider everything. In some cases, an HSA may be right for someone. And in some cases a high-deductible or HSA-eligible plan may not be the right thing for someone. And really just to go over a couple of things to consider. And one of the things I always encourage people to do is side by side your options for health insurance. And you really wanna look at the premiums, the deductibles, because an HSA-eligible plan is gonna have a higher deductible. So you have to look at that as part of the consideration.
Yes, it is cheaper for the employer and that’s really why they try and incentivize with some of those payments that they probably make to an or may make to an HSA on your behalf. The other thing you wanna look at is your out-of-pocket maximum. So what this is, is let’s say, you know, you hit the deductible and then there’s probably some kind of coinsurance. And then there’s what’s called an out-of-pocket maximum. Which means, you know, something catastrophic happens, you’re on the hook up to a certain amount.
So that’s really what can come outta your pocket. And you really wanna look at that because, you know, I always tell people, look at the worst-case scenario. Look at something, you know, try and envision something bad happening. This is how much you’re gonna be responsible for on this plan versus this plan. And a lot of times the HSA-eligible plan may have a higher out-of-pocket maximum. So it’s that again is something definitely to consider. Hsas are typically people that are healthier that don’t visit doctors as often. You know, and obviously no one knows for the upcoming year what their medical expenses are gonna be.
But maybe you have some kind of chronic condition. Or, it doesn’t even have to be a chronic condition. Maybe you’re pregnant or planning to have a baby. There’s gonna be considerable expenses. And you wanna take that into consideration the year that those may happen. Because again, that out-of-pocket maximum may be higher. You know, do your kids play sports and maybe there’s a chance of some major injury happening where surgery is needed?
Or this– And, and again, we can’t predict any of this. So the choice to whether to use an HSA-eligible plan or not and go with whatever other plan is offered, it’s very individualized. But I, you know, encourage everyone: look at the options. You know, try and do the math. And try looking at normal scenarios. What are you gonna pay for premiums? What is your deductible amount?
So the deductible is, what’s the amount that you’re gonna pay before any of the insurance actually kicks in. And try and do the math and just calculate, “On this plan, I think we’re gonna spend this. And on this plan, we’re gonna spend this.” And then factor in that HSA to that, especially if the employer’s contributing to it, as an ability to maybe pay some of that deductible or pay some of the expenses. And that’s really, you know, kind of how to go about evaluating, whether it makes sense for someone or not.
It’s really important to look at your individual situation. And I think what you hit on is really, kind of, vital to this whole conversation. I know a lot of risk-averse people don’t like the idea of a high-deductible plan. I get it. That makes total sense to me.
If you have regular hospital visits or regular doctor visits, and you don’t like the idea of having to pay out of pocket for all of those, one thing to consider is that HSA that you’re contributing to in addition to paying your premiums, you can use those funds. Not saying you should. But worst-case scenario, if you manage to save $10,000 in an HSA over the course of a couple years, that’s potentially your out-pocket-maximum on a high-deductible plan. And that’s your backup, that’s your insurance.
So it might make more sense if you are younger, if you’re in, you know, better shape, if you’re a little bit healthier right now, and you’re worried about the future, maybe take advantage of it now. The cool thing about an HSA is it stays with you after you leave a high-deductible plan. That money doesn’t get locked away from you if you decide to change back to, you know, a more conservative plan in the future. You still have access to it. And you can still use it for when you’re paying out of pocket to reimburse yourself.
Again, you won’t be able to invest that money for your retirement if you take it out, but it’s there in an emergency. And I think that’s what helped me sleep at night when I signed up for an HSA at the first time.
There’s really two ways to look at it. The strategy that you’re talking about is, yeah, you know, you have these expenses, deductibles, copays, you know, coinsurance. And the HSA is great for this. You know, you’re putting money in, you’re getting a deduction, you’re taking the money out to pay for expenses maybe in the year that you put the money in and. You’re not having to pay tax on that money coming out. So it’s great in that sense.
But some other people look at it, you know, and try to utilize a little bit different strategy where they’ll say, “You know what? I know I’m gonna be funding this HSA. Money’s gonna go into it and I’m gonna have medical expenses, but I’m gonna pay for those expenses outside of the HSA. So I’m gonna pay for those just with regular funds. And I’m gonna let this HSA account”–because of those tax benefits, where it’s growing and compounding and not having to pay tax on it–they let it grow.
And year after year, even though the maximum contribution limit is not as high as, like, a 401k, they’re putting in money every year and it’s growing and it’s growing. And you know, we can talk a little bit about what are your options once money goes into an HSA. But now what they do is now they have this retirement health budget. Fidelity did a study a couple years ago where they came out and said, “Couples in retirement, their average out-of-pocket expenses are over $200,000.”
You know, everyone thinks, “Okay, I’m gonna go on Medicare and that’s gonna be the end of it. And you know what, everything will be taken care of going forward.” And that’s not really true. There’s all different types of expenses that you still have to pay even when you’re 65 and you retire and you go on Medicare. Hsas are a great tool to save for those types of expenses. And just to give a quick what are some of the out-of-pocket expenses? It could be your Medicare premiums, any supplemental Medicare coverage you have.
HSAs can be used for long-term-care insurance premiums. Or, long-term care itself. So there’s a lot of, you know, ways that… You know, people save in a 401k for retirement. And of course you can use your 401k to pay medical expenses. But HSAs are another tool that you can use when you’re younger to save. And you can use ’em to pay expenses, you know, as you’re young. Or you can save and actually use them, you know, down the road in retirement to pay for your expenses.
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If you’re doing your own calculations for yourself, it seems like that’s the kind of thing to keep in mind when you’re building your spreadsheet of your own plan for the future. Do you wanna set this aside to just grow forever? Do you wanna set even a portion of it aside to grow? Can we talk a little bit about what it means to have a high-deductible plan?
Yeah. And, you know, like we first started this off, the HSA, it has to be attached to a high-deductible plan. You can’t just go and say, “You know what? I’m gonna open up an HSA. And I’m gonna start pumping in that maximum annual limit.” There are certain characteristics of what makes a high-deductible healthcare plan.
The first obviously is a high deductibility. So what that means, you can have a certain healthcare insurance plan where the insurance company starts paying the minute you go to the doctor and you incur some kind of bills. But the way the deductible works is, they don’t start paying until you hit enough expenses that hit whatever that deductible is. As far as like what characterizes a high-deductible healthcare plan, the minimum deductible has to be $1,400 for an individual and 2,800 for a family.
So that means that’s your… You know, you go to the doctors for the first of the year, or, you know, whenever. And the insurance company is not gonna pay until you incur 1,400 or 2,800 worth of medical expenses for the start of the year. So that’s criteria one. The second is, so not every high-deductible healthcare plan is an HSA-eligible healthcare plan.
So it has to have a out-of-pocket maximum that has to be under a certain amount. So that is a little over 7,050 for an individual and 14,100 for a family. There are certain things you can’t be covered for. Like, HSA, a lot of times people will confuse it with an FSA or a flexible spending account. So if you are eligible and utilize an FSA, you’re not eligible for the HSA. However, a lot of people will use a dependent flexible spending account or dependent FSA. And that most of the time you don’t lose your HSA eligibility if you have one of those in place.
Those are the main things that go into what is a high-deductible healthcare plan. A question I get a lot too is, “I get my insurance from the exchange. Do they have HSA-eligible plans on there?” Or, “If I get my plan through an employer, are there HSA-eligible plans there?” So the answer is yes to both. So you can get an HSA-eligible plan through the exchange. And you know, a lot more employers we’re seeing offer them as part of the company benefit package that they’ll offer. Easiest way to determine whether it is an HSA-eligible plan or not if it doesn’t, like, explicitly say it, is ask. Because then they’ll tell you.
And it’s a very quick conversation or quick way to find out definitely this is one or not. Because you are on the hook for making sure if you open up an HSA account and you really weren’t eligible for one, you’re on the hook for any penalties or, kind of, unwinding it or anything that has to be done for that. So you do wanna make sure that, you know, if you do go forward with it, it is truly an HSA-eligible plan. The other difference between an HSA-eligible plan and another type of plan we didn’t really mention before is that the premiums are often lower on an HSA plan. So that is another benefit.
One of the features of an HSA that really make it beneficial, and you mentioned this earlier, is you don’t lose the money. So you put money into an HSA. And if you don’t use it, if you change jobs, if you go off your HSA-eligible plan, that account is still yours to use years down the road. If something happens to you, if you pass away, a spouse is able to be named a beneficiary and can utilize that HSA just as you could.
And you can invest in the same things that, you know, you invest in your investment account or in your IRA or in, you know, some type of other, you know, account that you have. So you have control over what’s in it. It’s not a black box. I mean, it could be in some kind of cash savings, money market, very conservative. You could do that if you’d like. Or you can really try and have some growth over time. But you do have the control over that. So that’s one of the features of the HSA.
So there you have it. That was Marc Bautis from Bautis Financial, host of the Agent of Wealth podcast, talking to us about HSAs. We were lucky to have him, as always. Today’s episode was edited by Genny Blauvelt. I’m the host and producer Jim Markus.
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