By now you have probably heard of the Health Savings Account (HSA). What you may not know is just how amazing this type of account actually is, in terms of premium savings, tax savings, and, most importantly, what you can invest in with your HSA.
Qualification Requirements. In order to have a Health Savings Account, you must be an “eligible individual.” To be an eligible individual, you must 1) have a High Deductible Health Plan (HDHP); 2) have no other health coverage, with certain exceptions; 3) not be enrolled in Medicare; and 4) not be claimed as a dependent on another person’s tax return. More complete information of the requirements may be found in IRS Publication 969, which is freely available at www.irs.gov.
While a full description of a HDHP is beyond the scope of this article, its key features are a higher deductible than many insurance policies and a maximum limit on the out-of-pocket expenses (including the deductible and co-payments, but excluding the premium payments). For 2011, the minimum deductible is $1,200 for self-only coverage and $2,400 for family coverage, and the maximum out-of-pocket expense is $5,950 for self-only coverage and $11,900 for family coverage. All major insurance companies offer HSA compliant plans. Employers may also offer an HSA compliant plan, since these policies tend to be less expensive. If the employer makes contributions to your HSA it is excluded from your income.
Premium Savings. Because of the higher deductibles and plan features, HSA compliant plans tend to cost less. When I switched from a policy with a $2,000 general deductible and a $200 drug deductible to an overall deductible of $2,200, the premiums for my family were reduced from $754 per month to $450 per month. That’s a total premium savings of $3,648 per year!
Tax Savings. One of the best features of an HSA is the tax savings for contributing to the account. Beginning in 2007, the contribution limit is no longer tied to the deductible. The contribution limit for 2011 is $3,050 for self-only coverage and $6,150 for family coverage. To the extent you make the contribution (as opposed to your employer), these amounts are fully tax deductible, no matter what your income level. If you are age 55 or older, you may contribute an additional $1,000 for 2011. There is even a one time ability to take a distribution from your IRA to fund your HSA with no taxes or penalty.
In my tax bracket, the ability to deduct my contributions is significant. I contributed $6,150 for 2011 and will save approximately $2,030 on my taxes. If you add the premium savings over a traditional health plan to the tax savings from contributing to an HSA, the total benefit to me goes a long way towards covering the cost of my contribution.
Distributions from an HSA for “qualified medical expenses”, which are broadly defined and include expenses for yourself, your spouse and your dependents, are tax free forever! Because the expenses only have to occur after the HSA has been established, virtually everyone will end up with qualified medical expenses at some point in their life. You can take a qualified distribution at any point after the expense is incurred, even in later years, provided you keep track of the expenses.
Investment Opportunities. Even better than the premium and tax savings is the ability to invest your HSA funds in non-traditional investments, just as you would in a self-directed IRA. Many banks and other companies offer the convenience of an HSA account with a debit card for you to pay medical bills with. However, if you are healthy and don’t have a lot of expenses or you can fund the expenses out of pocket, you can make your HSA account grow much faster with investments other than mutual funds or savings accounts which may pay very little.
With a self-directed HSA, you choose your HSA’s investments. Common investment choices made by self-directed HSA participants at Quest Trust Company Inc. in Houston,Texas include real estate, both domestic and foreign, options, secured and unsecured notes, including first and second liens against real estate, C corporation stock, limited liability companies, limited partnerships, trusts and much more. In my own HSA I have a portion of two hard money loans generating yields of 12%, a portion of a shared appreciation mortgage which generates 10% in addition to a share of profits when the property is eventually sold, and a membership interest in an LLC owning a debt-fee rental unit.
The Health Savings Account is truly the best of all worlds. It can significantly reduce your health care premiums, reduce your taxes, and produce tax free wealth through non-traditional investments in a self-directed HSA. With a self-directed HSA (or IRA), you don’t have to “think outside the box” when it comes to your HSA’s investments. You just have to realize that the investment box is much larger than you think!