The basic premise:
Tax-advantaged benefit accounts – like health savings accounts (HSAs) and flexible spending accounts (FSAs) – were created to help save and pay for healthcare in a tax-protected manner. Simply stated, every dollar you put into one of these accounts is worth more (up to 30% more!), because you don’t get taxed on the money you put in – and, your IRS-reportable income is decreased by however much you contribute. The phrase “free money” comes to mind for many.
The reality of the situation is this: Regardless of what health insurance plan you choose to participate in next year, you really should open and fund a tax-advantaged benefit account. It’s rarely a matter of should you enroll, but rather how much should you contribute to your account.
Planning and calculating your election:
While many election planner calculators exist to help you better understand your individual healthcare and financial situation, there are some important things you should understand and consider – because deciding how much money to put in isn’t always a perfect science:
- How much did you spend on healthcare last year? If last year was a normal healthcare year for your family, consider funding up to the lower of the two figures: (1) last year’s total spend, or (2) the IRS limit for the account. If you’re going to spend, get the maximum tax savings.
- HSA 2019 IRS Limit:$3,500 for an individual and $7,000 for a family
- FSA 2019 IRS Limit: $2,650
- To the best of your ability, predict the health expenses your family will incur next year and the costs of these expenses. Add up all your prescriptions, doctor visits, surgeries, orthodontia, and other anticipated costs. The sum of these costs can be a great minimum starting point for your election. At a minimum, contribute what you know you’ll spend for certain.
- What’s your deductible? If you’re not sure what you’ll spend, putting enough money in to cover your deductible is a great strategy. If you’re someone who typically reaches your deductible, you might as well reap the tax benefits of using your account to pay for your deductible.
- What will you do with extra funds?If you find yourself half-way through the plan year having used less money than planned, don’t worry.
- For HSAs, unused funds roll over year to year, can be invested, and grow tax-free – turning the account into a long-term investment vehicle that helps you save for future healthcare expenses.
- For FSAs, there are several great ways to leverage funds, like: Family planning, eye care, contact solution, acupuncture, sun block, and more.
- Arguably the hardest part of healthcare budgeting is planning for the unexpected. If you’re typically a high healthcare user, it will probably benefit you to increase your election by adding some ‘buffer funds’ on top of what you know you’ll spend. If you’re generally healthy and a relatively low healthcare user, you may consider forgoing additional wiggle room.
The bottom line
If there was a way to perfectly predict your healthcare spending, you wouldn’t be reading this. But, budgeting your healthcare finances can be downright challenging. The good news:
- Tax-advantaged benefit accounts give you a little tax-protected help to save on healthcare expenses
- Our election planning calculator helps you run different election/spending scenarios to help your decision making
- For HSAs, the money in the account is yours, carry’s forward year to year, and any interest or other earnings on the account are tax free
- For FSAs, if you over-fund the account, there are many everyday items you can purchase with your FSA. It’s better to over-fund then under-fund and miss the tax savings altogether.
Many people fail to realize the tax and retirement savings potential associated with tax-advantaged benefit accounts – do your homework, use these tips, predict your spending, and rest assured you’re doing your best to save for healthcare expenses.