An HSA is essentially a tax-advantaged account where you can save money for healthcare expenses. Contributions to the HSA are made with pre-tax income, and the funds grow tax-free. When used for qualified healthcare expenses, withdrawals are also tax-free. HSAs are often recommended for retirement planning because they offer triple tax benefits. The money contributed is tax-deductible, it grows tax-free, and qualified withdrawals are tax-free.
Additionally, HSAs provide asset protection from creditors and lawsuits. Eligibility for an HSA depends on your health insurance plan. For singles, the plan must have a minimum deductible of $1,600 and a maximum out-of-pocket expense of $8,050. For families, the deductible should be at least $3,200, with a maximum out-of-pocket cost of $16,100. Contribution limits for 2024 are $4,000 for singles and $8,350 for families, with an additional $1,000 catch-up contribution for those over 55. The video discusses a scenario comparing a low deductible plan with a high deductible plan.
It illustrates that HSAs are beneficial if you’re generally in good health and expect to have lower healthcare expenses, as you can save on premiums and enjoy tax savings. However, if you anticipate a major health event, you might consider switching between plans to minimize costs. Ultimately, the decision to use an HSA should be based on your individual circumstances, health, and financial goals. It’s a valuable tool for saving for healthcare costs and optimizing tax benefits, especially in retirement.
You, we’re going to go a deep dive into health savings accounts. What are they? And specifically, who would want to opt into a health insurance option that also comes with a health savings account option. So a health savings account option is essentially a bucket of money, similar to like an IRA or 401k that you can fund in every year. The money that you fund in goes into the bucket without taxes. Meaning if you have $100,000 of income and you put in 5000, that 5000 is not going to be taxable. So you don’t get taxed at 95,000 of income. It’s a direct deduction off of your income, just like a pretax 401k would be. As it’s growing, so the no taxes on the way in, no taxes as it grows.
And then when you take it out, it’s also tax free, assuming it’s used for qualified events like for health care, and typically because of it being triple tax free in, tax free growth and tax free out, we recommend actually wait to use the funds until you are retired. For example, at 65, you can use the money in your health savings account for things like Medicare premiums and out of pocket expenses, et cetera. So the other good advantage of an HSA is it is asset protected in most states, just like a 401k would be creditors, lawsuits, et cetera. Would be extra layer of protection for this money. So with that being said, one thing you have to look out for in the HSA is once you get the money in, the general default mode of this will be that it’s in cash.
And this is how the HSA companies make a lot of their money, is the spread of the interest they pay you versus going and reinvesting that money on their own. So highly recommend. Most companies will recommend or will make sure that you have a minimum in cash, usually around $1,000. You have to go in there and manually sweep the money into an investment account, and then you can actually set a minimum. Anything above like that thousand dollar minimum will automatically go to the investments. And I would recommend highly to automate contributions to your HSA direct out of your Paycheck or do a one time front load if you’re self employed and doing this by yourself. But make sure that money stays invested.
And then if something happens in a year, for example, you fund in 2024, hypothetically, and then something happens to your health where you need to pay out of pocket. We’d recommend you pay out of cash and keep this money sacred for retirement. So it’s often referred to as like a stealth IRA, because it’s an extra money on top of your 401K, on top of your IRA, that you can put money in a tax deferred manner. And one of your biggest expenses in retirement will be healthcare. This is a great way to fund it, and to fund it completely tax free as distributions from the HSA when you retire, don’t factor into your Magi modified adjusted gross income. So it’s a huge advantage when trying to manage tax brackets. All right, so next, let’s talk about eligibility.
So, eligibility, if you are single versus married, referred to as family. So if you’re single, the first thing is you need to have a minimum deductible of 1600. That needs to be the deductible on the plan. And then if you’re a family, just double that to 3200. The other thing, you have to have a maximum out of pocket. 8050 if you’re single and that’s your out of pocket. And then if you are family, that would be double, be 16,100 would be your out of pocket maximum. So with that being said, now let’s talk about the fun part. So how much can you put in? So, contributions, if you are single, are in 2024, 4000 and 150 per year. And those get indexed with inflation typically every year. And if you’re a family, you can put in 8350.
And then if you are over the age of 50, there’s $1,000. Catch up. Actually, I’m sorry, over the age of 55, you can put an extra $1,000 in. So let’s break down the math here. So let’s say hypothetically, you are a married couple. All health benefits are one spouse. So this is the spouse making this decision. And let’s say over here we have a low deductible plan. And I’m just going to keep the math really simple. So let’s say that your whole family, this costs you $500 a month, which would be $6,000 in premiums. You have $1,000 deductible. And then let’s say a 5000 out of pocket maximum versus the other option could be a high deductible plan that cost you 250 a month as a family. So that would be 3000 for the year of premiums. But now the deductible is higher.
So the minimum deductible you need is 3200. So let’s say the deductible is just that $3,200 deductible. And then the out of pocket is also high. So let’s say it’s $15,000. All right, so let’s break down the math. So here on the lower deductible, let’s talk about a best case scenario and then a worst case scenario. So best case scenario is you’d pay the $6,000, everyone stays healthy, and that’s all you pay. There’s no doctor visits throughout the year. Let’s say worst case scenario, a catastrophe strike. So you pay the $6,000 in premiums. That’s what you have to pay. No matter what. You reach $1,000 deductible. You also reach the out of pocket maximum. So you pay an extra $5,000. So the total you would pay that year is 11,000 for you or your family members. Compared to over here.
You would pay best case and worst case. So we’re going to say best case, $3,000, you pay, however, that 8350 that you put into the HSA, assuming you’re in the top tax bracket. So we put in 8350. So just talking about the savings. So it’s a 37% federal savings. Just doing some quick math here of 3089. So, best case scenario, the tax savings here would actually, you’d be in the positive, where you’d have the negative means you would save $89.50. Essentially, the health care plan wouldn’t have cost you anything. And then worst case scenario, you paid the $3,000 in premiums, you get the tax savings of the HSA. That’s 3089. So now we’re 89 50.
But going back to your out of pocket, the worst case scenario, like every major health concern that you possibly could imagine comes up and you pay the out of pocket maximum of $15,000. So here, let’s compare the best case and worst case. So the best case and worst case in the low deductible is you’re out of pocket for 6000 versus it’s basically free, so you just save $6,000. Worst case scenario, you paid 15,000 versus 11,000. And so an HSA becomes really a good option if you’re a generally good health and you’re going to fall under that best case or mid case every year, where you’re going to have not only the lower premiums, but also the tax savings of the HSA.
What you wouldn’t want to do if that out of pocket maximum in this analysis, if you have a big surgery coming up or a known health event, then you’d want to bounce back and forth between a low deductible plan and a high deductible plan. Sometimes these out of pocket maximums actually are low enough where even the worst case scenario is better than the worst case scenario in the low deductible plan. So this has to be done in a case by case basis. But for today’s video, just wanted to provide what is an HSA, what are the limits? And then ultimately, how to analyze worst case and best case and determine what’s best for your family. Please reach out if you have any questions.