HSA Plans: A Cheatsheet For The Radiology Resident
Over the past several years, the way health insurance covers residents has drastically changed. And, residents have been caught unwittingly in the crossfire. Recently, in order to save money, many hospital health insurance plans have moved to a high deductible version from plans that cover most day-to-day expenses. Since these changes have taken effect, many of you have to contribute more of your own pocket money to pay for these medical expenses. In order to meet your these health care expenses, the government has created a new savings vehicle called the health savings account (HSA). (1) And, many of you have the ability to take part in such a plan. But, is it worth your while? How much should you contribute, if anything? These are some of the questions that I shall attempt to answer today.
The Mechanics Of The HSA
In summary, this savings plan can serve several purposes. First, you can use the HSA plan to cover those expenses that do not meet the deductible amount. So, how does this work? Typically, the institution that you work for will take out a certain amount of money from each paycheck on a pretax basis, usually biweekly or monthly. And, they will add these dollars to your HSA account. Depending on the needs of the resident, you may decide how much to add to this account for the year up to a maximum of $3450 for a single resident and $6900 for a resident family in 2018. So essentially, you can use this pretax money for your health benefits. Most importantly, however, you can roll this money over from any given year. What you leave in your HSA account stays inside the account in perpetuity and can be added to the HSA at your next job. It’s all yours!
Best Way To Use The HSA Account
Even though off the bat you are saving tax dollars to pay for your day-to-day expenses, think twice about using these extra savings for your present health care needs. Why would I say something like that? Well, since you get the money pretax and then you can take the money and invest it without paying a dime on the interest earned if you use it for health care, it is the ultimate account to not pay taxes both on the front end and also on the back end when you take it out. Think of it as a way to avoid taxes altogether. So, for most of us, it becomes the best investment vehicle possible. Really, no other accounts give such a great tax benefit like this.
Let me give you some comparisons. We all need to pay income taxes on Traditional IRAs and 401k plans when we take the money out. And, we all must pay the income taxes on the money in a Roth IRA prior to putting into that account. Unlike these other accounts, the HSA account is the only one that allows you never to pay a dime of taxes on the money ever! Therefore, if you can afford to put away some of this money without using it on a yearly basis, then you can invest this money tax-free and get the most benefit out of it as possible.
In addition, typically, most retirees use over 300,000 dollars to pay for medical expenses. (2) That’s a lot of dough! And through the magic of compounding, since residents have a long career ahead of them, this account can potentially cover those expenses. So ultimately, this can be your medical care retirement account!
How Much Should You Contribute To The HSA?
This is probably the toughest question of them all. It really depends on what you can afford. For those that have very high debt loads, you probably shouldn’t fill the account to the maximum. Rather, pay down at least some of the interest on your loans up to the $2,500 maximum deductible amount. But, it certainly pays to put at least a little into this account since the tax benefits are so high. For those with a lighter debt load, try to maximize what you can put into this account. In fact, you may want to substitute some of the money for savings in other vehicles to pay for the investments in this account.
Final Thoughts About Resident HSA Plans
There is no such thing as a free lunch. However, the HSA comes as close as I have seen to one. So, make sure to seriously consider the benefits of an HSA. And, think hard about contributing as much as you can. It can make the difference between a harried and a worry-free retirement!