How to Manage Health Savings Accounts

Health Savings Accounts consist of two parts - the high deductible health plan (HDHP), and the Health Savings Account (HSA) itself.  By carefully choosing which bank you use to establish your HSA, and strategically choosing how to fund your account and manage your investment, you will be able to get the most return on your money while keeping your expenses to a minimum.

Make Sure to Establish Your Health Savings Account

By switching from a conventional copay health insurance plan to a high-deductible health insurance plan (HDHP), most people are cutting their health insurance costs by about 40% or so.  This is such a big savings, that many people neglect to take the next step and set up their HSA.  But this is a financial mistake that is costing them money.

Unless you pay no income tax and have zero medical expenses (including dental, over-the-counter medications, or charges for alternative care like chiropractic or acupuncture), you will absolutely save money by establishing your HSA.  Just find a good HSA Administrator and get started. 

Run All Your Medical Expenses Through Your HSA

Not everyone feels like they have "extra" money that they afford to set aside in their HSA, despite the tax savings and other financial benefits.  Even if that's the case, you should still establish your HSA.  Every time you incur a medical expense, deposit at least as much money as you spent on that medical expense.  For instance, if you went to the dentist and it cost $85, put $85 in your HSA.  If you like you can then take it right back out.

What this does is convert this medical expense into a tax-deductible expense.  Then when you file your taxes next year, you can put the total amount that you ran through your HSA on line 25 of your 1040, and deduct it from the total income you report.

Cover Your Deductible

Your next step is to get enough money in your HSA to cover your deductible.  For 2008, deductibles range from $1100 to $5600 for individuals, and $2200 to $11,200 for families.  Annual contribution limits are $2900 for individuals, and $5800 for families.  So it could take a couple years or longer to get enough money in your account to cover your deductible.

Once this money is in your HSA, you will have the confidence of knowing that you can cover most any medical expense that comes your way, particularly if you have a health insurance plan that pays 100% after your deductible.

As you continue to build money in your account, you may want to consider switching to a health insurance plan with an even higher deductible, which will further lower your premiums.

Minimize the Fees You Pay

If you will be using your HSA to pay medical expenses as you incur them, you should keep an eye on the fees your bank charges.  Until you have enough money in your account to cover any fees with investment returns, you probably want to have your HSA with a bank that charges no fees.  (Several are listed on the website referenced above).

If you plan to access money from your HSA to pay ongoing medical expenses, you may wish to keep a portion of your HSA money in a savings account or short-term CD.  But to take maximum advantage of your HSA, you'll want to eventually move some of the funds to investments that have a higher potential return.

Investment Options

No other investment has the triple tax-advantage that Health Savings Accounts offer.  Not only is your Health Savings Account deposit tax deductible, and your withdrawals to cover medical expenses tax-free, but your investment also grows tax-deferred make Health Savings Accounts a great investment option.

Taking advantage of tax-deferred growth is one of the best ways to build long-term savings. Some banks will provide a short list of mutual funds you can invest in, while others provide access to an online discount brokerage such as Ameritrade where you can choose from stocks, bonds, mutual funds, and more.

The most aggressive strategy is to pay your medical expenses from somewhere other than your HSA, and save the receipt.  You can then reimburse yourself at a later date.  The additional growth you get from not paying any taxes on your investment may be enough to cover all your medical expenses.