What if I told you there were 3 ways you could save money on taxes AND health care? Psh, it’s like the ultimate way to kill two birds with one stone. Not to mention, any way you can learn to stick it to taxes during tax season is a big thumbs up.
So today we’re going to cover the HRA, the HSA and the FSA, how they work, and how they will make a big difference for your finances.
Health Care is Rising
Health care continues to rise year over year. The Balance, a website dedicated to making personal finance manageable and understandable, laid out these statistics.
From 2013 to 2018, the increase in health care costs year over year was an average of about 4.78%. And for reference, the inflation rate during those same years averaged at about 1.52%.
These numbers tell us one disappointing detail: health care costs are not only growing but they’re outgrowing the average rate of inflation. So it’s more important than ever to save the money we can on health care.
And three of the best ways is through an HRA, HSA, and an FSA.
1. The Health Reimbursement Arrangement (HRA)
The HRA stands for Health Reimbursement Arrangement or as some call it, Health Reimbursement Account. This is funded and owned by your employer if they provide it.
Your employer puts a certain amount of money into the account and this reimburses you for certain out of pocket health care expenses. Mine is $750 and can be used for most health care related things. Dental work, chicropractic care, co-pays, deductibles, etc.
I am relatively healthy as is so I don’t tend to use the full amount. And I can carry up to $750 into the following year. However, since this is owned by the employer, it cannot be carried across employers or kept if employment is terminated.
You may say, Caleb, this is provided by your company, how are you saving taxes?
Well, any extra benefit I get from my company does not count as taxable income. So every bit of my HRA that I use is that much I wouldn’t have to use of my own taxable income if I need to visit the doctor. Gotta love it.
2. The Flexible Spending Account (FSA)
The second saving model is the FSA or the Flexible Spending Account.
I like the HRA provided me by my company, but the FSA is what allows me some extra financial flexibility. The FSA allows you to put $2750 into the account every year as pre-tax dollars. So essentially, the government sees less money in your gross paycheck to tax because a portion has already been taken out for funding your FSA.
The FSA is very flexible. It can be used for dental costs, copays, prescription drugs, deductibles, all the way down to buying bandaids at the store. It’s cool because the FSA allows you to use the contributed funds towards the health care costs of your spouse or dependents as well. But, plan it out well, because employers allow a maximum of $550 that can be carried over into the following year. Some employers don’t allow anything to be carried over.
Bailey and I both have one of these at our work. The nice thing is it can cover a lot of extra stuff. And if you’re in a 22% tax bracket, it’ll save you over $100 in taxes if you contribute $500 to it.
Normally, given our relative good health, we only put $550 in to avoid losing any money as the year turns over. Unfortunately, if you lose your job or change jobs, you can’t take it with you.
3. The Health Savings Account (HSA)
Okay our last one is the HSA. This thing is a beast under the right circumstances.
The HSA stands for Health Savings Account. This financial monster is the Ferrari of health care savings plans.
First of all, your HSA is fully owned by you. Which means you can take it anywhere you want. If you quit working for an employer, you can take your HSA right along with you.
Second, the HSA has triple tax savings! This means the money you put in is not taxed, the money you use is not taxed, and any interest earned in the HSA is also not taxed.
Which brings me to my third point: The HSA can be invested into a broad range of mutual funds so it grows as the stock market grows. That is freaking awesome. And to boot, it can be used for most health related expenses.
What’s not to like about an HSA? Well, not everyone can get it. I can’t get it through my work. And, it can only be obtained in conjunction with a high deductible health plan. Which means that if you have a lot of health issues, it will cost you a lot of money before insurance begins to pay.
But overall, The HSA is a seriously good way to prepare for future health costs.
Don’t Miss These Benefits!
Obviously, these options will change depending on where you work and what options are offered. My work doesn’t actually offer an HSA. But I’m able to get an HRA and an FSA through my work.
So, what I would recommend is going to your HR representative and get clarity on what options you have. Regardless, as Health care costs keep rising, these three options are excellent ways for you to make up for that faster rate of growth within medical costs.
So I pass this question onto you: what kinds of options do you have available at your place of employment?
What options are you taking advantage of?
I’d love to hear from you in the comments down below!
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