Millennials who don’t need much health care often choose cheaper insurance with a high deductible. If you’re in that age group, a great complement to your plan is a health savings account (HSA), which helps you fund your health care costs until you meet the deductible.
I’m a fan of HSAs for Gen Y. They offer a level of flexibility that is practically unheard of in other health insurance plans. Here are a few reasons why:
You get a tax break. Your contributions are free from income tax, and the withdrawals for medical expenses are tax-free. By investing more money into your HSA, you reduce your tax burden and make more money available to your future self.
Some people choose to use their HSA like another individual retirement account. They save their health-care receipts in case they decide to withdraw funds from their HSA at some point, but choose not to touch the money until retirement. At 65, you can access the money in your HSA for anything, not just health costs, without paying a 10% penalty. You do have to pay taxes on the distributions, like with an IRA.
You contribute to your HSA during the calendar year. The maximum amount of contribution to your HSA as a single taxpayer is $3,300 for 2014 and $3,350 for 2015. ($6,550 and $6,650 for families) There is a $1,000 catch-up contribution for those over 55.
The money in your HSA is yours to keep. Gen Y has a reputation for being job-hoppers. While changing jobs leads to more pay, it costs you company benefits, which usually don’t come with you when you switch positions. A health savings account is different because you own it. You can take it with you when you leave your employer.
There’s no time limit for using the money. The value rolls over from year to year. For example, if you contribute $3,000 to your HSA but only use $1,000 this year for health care expenses, the remaining $2,000 stays in your account. The same can’t be said for similar health savings vehicles, such as flexible spending accounts. (Here’s an article I wrote about the differences between the two.)
You can invest the money in your HSA. Some HSA plans require you to have a minimum, such as $2,000, in your account before you can invest, but others allow you to invest immediately. I recommend keeping enough cash to fund your deductible, but after that, you may want to consider investing a portion of your HSA to accrue value.
Beware that if you choose to invest the money in your HSA, you are subject to market risk. This is just like any other investment; they all come with risks.
The range of qualified expenses is pretty wide. You can use your HSA for any health-related expense (with the exception of over-the-counter medications). You can use it to purchase contacts, prescription glasses, crutches, dental care, lab fees, blood tests and more. I just used my HSA last year to pay for laser eye surgery.
While I enjoy HSAs, they’re not without flaws. To qualify for a HSA, you must enroll in a high-deductible health plan. In 2014, your deductible must be at least $1,250 for individuals or $2,500 for families. You are responsible for your medical expenses until you reach the deductible, which can put strain on people whose incomes are low or erratic.
Before setting up an HSA for yourself, check with your provider to make sure your doctor is within network. If you don’t yet have a doctor, check your provider’s website and search for one. For example, if you sign up with Blue Cross and Blue Shield for your high-deductible plan, go to bcbs.com to find doctors in your city.
Despite the intentions of the Affordable Care Act, it doesn’t look like medical care will get cheaper in the long term. By investing in an HSA now, you can build up another account to help guard you against medical emergencies that may come up along the way.
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Sophia Bera, CFP, is the founder of Gen Y Planning and is the top Google search for “Financial Planner for Millennials.” She works virtually with people in their 20s and 30s across the country as she builds a location independent practice. She is a contributor for the AOL Daily Finance website and has been quoted on various websites and publications including Forbes, Business Insider, Yahoo, Money Magazine, InvestmentNews, Financial Advisor magazine and The Huffington Post. Sophia is a sought-after speaker and presenter and in her free time enjoys performing as an actor/singer and traveling the world. Follow her on Twitter @sophiabera or sign up for the Gen Y Planning Newsletter to stay up to date on financial articles geared toward Millennials. Oh, and she’s not your father’s financial planner.
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