You Can't Afford to NOT Fund Your HSA

"HSAs are for rich people."

Maybe you've heard this before. Maybe you've assumed it. But let's clarify: HSAs are for anyone who has an HSA-qualified high-deductible health plan (HDHP), and who thinks they might have out-of-pocket medical expenses at some point in the future.

That's because HDHPs aren't as scary as they sound. The minimum deductible for an HDHP in 2024 is $1,600 for an individual, but this is actually lower than the 2023 average deductible for employer-sponsored health plans. According to the Kaiser Family Foundation's annual employer benefits survey, 85% of covered workers have deductibles, and the average deductible is nearly $1,735 for a single employee.

If you pick an HDHP, you'll likely find that your premiums are typically lower than they'd be for a traditional health plan with copays and a lower deductible. But you still have to contend with the out-of-pocket costs for your health plan, if and when you have a medical claim.

And although HDHPs tend to have higher initial out-of-pocket costs -- because all non-preventive care expenses are applied to the deductible, instead of being covered with copays -- it's common to see total out-of-pocket costs that are similar for both HDHPs and non-HDHPs.

In other words, if a serious medical condition arises, you're likely to face significant out-of-pocket costs regardless of whether you have an HDHP or a traditional health plan.

Funding your HSA

This is a big part of having a plan to deal with inevitable medical costs. It might be years before you actually have a significant medical claim, but that's the beauty of an HSA: The money will be there in your account until you withdraw it, since there's no "use it or lose it" provision with HSAs. And if you have your HSA through your employer and you leave your job, the HSA goes with you.

Once you've accumulated some money in your HSA, you'll have the peace of mind of knowing that you've got your own back when you run into unexpected (or expected) medical bills. And even if you switch to a non-HDHP in the future (and aren't allowed to make any more contributions to your HSA), you can still use the money that's already in the account to pay out-of-pocket costs on your new health plan.

"But how in the world am I supposed to go about stashing thousands of dollars in an HSA?!"

A journey of a thousand miles starts with a single step, and so does a solid cushion in your HSA. What if you committed to putting $50 into your HSA each pay period? If you get paid 26 times per year, that's $1,300 that you'll have contributed by the end of the year. If you don't end up having medical costs and can just leave it in your account, it can grow over time, either with interest or investment gains.

And keep in mind that the $50 you're contributing is pre-tax. If you're in the 25% tax bracket and you opt to just take the $50 in your paycheck instead, you'll only get $37.50, because Uncle Sam is going to take $12.50 of it. But if you contribute it to your HSA, you get to put in the whole $50.

And as long as you eventually use that money to pay for medical expenses — even if it's years or decades down the road — you'll never have to pay taxes on that $50, or on any interest or investment gains that you earn while it's in your HSA.

Particularly if your HSA allows you to invest the funds, your $1,400 per year in contributions could grow to five figures sooner than you might think. If you contribute $50 every two weeks to an HSA, earn an average of 4% on your investment, and don't need to withdraw money from the account, you'll hit $10,000 within seven years.

And in 20 years, you'll have nearly $40,000. Obviously, that's a very simplified example. Real-life investing tends to be a lot messier, and you should consult with a tax advisor before deciding what to do with your HSA funds. But instead of thinking about trying to save thousands of dollars in your HSA, ask yourself whether you can contribute $50 per pay period. Or $100. Or $25. Anything is better than nothing.

That's true even if your goal is just to cover current medical expenses, instead of accumulating a rainy day fund for future medical expenses. If you're anticipating a medical expense in the near future, you can put money in your HSA and take it right back out again to pay the bill, using pre-tax dollars rather than post-tax dollars.

If you owe a doctor $500 and you're in the 25% tax bracket, you'd have to earn $667 in order to pay the bill with post-tax money, because $167 of that money would go to taxes and the other $500 would go to the doctor. But if you use your HSA, you can earn $500, put it into your HSA, take it out to pay the doctor, and the money is never taxed.

The short story is that if you're eligible to contribute to an HSA, you can't afford to not contribute. Eventually, you're going to run into medical costs, and paying them with post-tax dollars is going to be a lot more expensive — and stressful — than using tax-free HSA funds.