Anytime I try to do my benefits the description isn’t helpful in explaining why it’s such a good investment move, aside from stating the obvious that it saves money incase you need it. Do I have to invest it? Or do you just let it sit? I’m confused
In: Economics
It’s important here that you understand what it means for money to be taken out of your income “pre tax” vs “after tax”
Say you earn $50,000 per year and your tax rate is 10% (just to keep the math simple). So you pay $5,000 in taxes. Then you have a $1,000 medical bill, so you pay that. This leaves you with $44,000 to spend on everything else in life ($50,000 – $5,000 tax – $1,000 medical bill = $44,000)
If you put $1,000 into a HSA “pre tax” that means that on your tax return it will look like you only made $49,000, and at 10% tax that means you pay $4,900 in taxes, saving $100. You then spend the $1,000 from the HSA on a medical bill. SO you have $50,000 income, less $4,900 in tax, less $1,000 in medical bills and you have $44,100 left over to spend on everything else.
Effectively by using the HSA you end up with an additional amount of money in your pocket. This can be calculated by taking the amount of money you intend to put into the HSA multiplied by your effective tax rate. Since most of us pay more than 10% tax, the actual savings are substantially larger than in the example above.
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