Welcome to Dollar Scholar, a personal finance newsletter written by a 27-year-old who’s still figuring it out: me.
Every week, I talk to experts about a money question I have, whether that’s “What if I don't have a 401(k)? or “How many credit cards do I need?” As I learn, I share simple ways to improve your financial life… and post cute dog photos.
This is (part of) the 32nd issue. Check it out below, then subscribe to get future editions of Dollar Scholar every Wednesday.
With ultra-scary coronavirus headlines dominating the news, I feel like we could all use some levity. So let’s start off this health-themed Dollar Scholar with a brief list of funny ways I’ve injured myself.
- gotten stung when a bee flew up my pants
- hit myself in the mouth with a baseball bat
- broken my fingers because a boy stepped on them
- scraped my wrist with a frozen hash brown and drew blood
- choked on a piece of sliced turkey and had to go to the ER
- slipped between the train and platform at a Taylor Swift concert
- been knocked unconscious after charging into my brother at full speed
- walked into an electrical box while dressed in a butterfly costume AND drinking wine out of a coffee cup
Needless to say, having my health care in order is pretty important for my clumsy, unathletic self. I’m fortunate enough to have insurance through my employer, but I’m still bewildered by the terminology. I barely understand what a deductible is, much less how a health savings account works.
Like, do I need one? The above instances notwithstanding, I don’t really go to the doctor that much. Should I have an HSA if I’m young, single and relatively healthy?
Jordan Sowhangar, a CFP and wealth advisor at Girard in Pennsylvania, told me that an HSA can be “an awesome savings tool” depending on the person. To be eligible, I need to have a high-deductible health plan — one with a deductible of at least $1,400 ($2,800 for a family). The total out-of-pocket expenses can’t exceed $6,900 for an individual ($13,800 for a family).
HSAs are in vogue. According to a 2019 survey from investment advisor Devenir, 26 million Americans have HSAs. Among those making contributions, the average employee contribution is just over $1,100. (The limit for 2020 is $3,550 for an individual.)
The idea is that the HSA can help cover expenses while I’m waiting to reach my deductible and have insurance kick in. It can be used for co-pays as well as things like acupuncture, birth control pills, glasses, hearing aids, therapy and x-rays, according to HSACenter.com. To access the funds, Sowhangar said HSAs often offer customers a debit card or a reimbursement program.
But Sowhangar said the true value of an HSA for someone like me is in the details. HSAs provide what’s called a triple tax benefit. Not only do the contributions I make to the account reduce my taxable income, but they also earn tax-free interest. And — this is the best part — as long as they’re being used for qualified medical expenses, I don’t have to pay taxes on withdrawals.
The money doesn’t have to just sit there, either. It can be invested. Plus, unlike with a flexible spending account that resets at the end of the year, there’s no deadline for using it.
“That triple savings can continue to work for you well into your 60s, 70s, 80s, what have you,” Sowhangar says.
I shudder to think about getting old, but having an HSA is a great way to prepare for retirement, according to Bill Sweetnam, legislative and technical director at the Employer Council on Flexible Compensation.
Similar to a 401(k), there’s a penalty for taking money out of my HSA for non-medical expenses before I turn 65. But after that age, I can withdraw from my HSA for anything as long as I’m down to pay taxes on it.
“It’s a very good long-term way to save,” Sweetnam adds.
Bottom line: If I have a high-deductible health plan, it’s probably worth looking into an HSA. Sowhangar acknowledged that they aren’t perfect for everyone, but she did point out that time is on my side. Even though my medical expenses aren’t high right now, they probably will be when I get older, so I should start putting money into an HSA ASAP.
At the very least, it can help me build up a nice nest egg.
“It’s almost like a supplement to other savings for retirement you have. This one just happens to be earmarked,” Sowhangar says. “Take advantage of the fact that this could grow, tax-free, for you for so many years.”