HSAs and savings
Question: My employer recently ended group health insurance and "helped" us find individual plans. They are also kicking in some money each month to help cover our new premiums. My husband and I are young and in good health, and so our new plan is actually much cheaper than our previous plan, although it covers a lot less. Our previous plan was a high deductable HSA, as is our new individual plan, so I already have an HSA account. I get paid bi-weekly, and will be receiving almost $200 more per pay check, that was once spent on health insurance. My question is, should I put all of that money into the HSA, or should I put some into the HSA and some into a regular savings account? We currently have a very small amount of savings. Thank you. I love your show! Maria, Minneapolis, MN
Answer: I've been sitting here wondering what I would do in your circumstances. I agree with you that the goal is to automatically save the $200 a month no matter what.
I don't have all the details. For instance, if your employer is putting in a good amount of money then I'd put the $200 into savings.
But what if you don't have much in the HSA? I would initially take full advantage of the tax-sheltered HSA account. The maximum HSA contribution into a special tax-sheltered savings account for family coverage in 2010 is $6,150 and for single coverage it's $3,050. There is no use-it or lose-it rule with an HSA. The money that isn't tapped to pay for medical expenses this year stays in the tax-sheltered account. It compounds over time.
My thought is for you to have a healthy (no pun intended) medical savings account. That could mean hitting the maximum contribution limit for this year, or some other number you figure makes sense. Since you already have an account and your employer is contributing it might not take very long for you to reach a sensible cushion against expected and unexpected medical expenses.
As soon as you hit your target level of HSA funding I would start sending at least half and as much as all of the $200 automatically into a regular savings account. This will then build up your emergency savings.
Does that work for you?