I doubt few people will fall into this exact situation. But a good exercise to help you think through some of these things. I think if you are healthy and single an HSA actually is a pretty good deal, especially if you are good at saving.

For a family with high medical expenses in a state that doesn't conform to federal rules. Blech. It gets a little better for us every year. But still not quite there. I don't think. I am trying to run through the #s though.

For starters, our medical expenses will be $10k this year. 7.5% of our income is about $5k. So everything we pay over that $5k (7.5% threshhold) is deductible on Schedule A. We also have a big mortgage and lots of state taxes. Obviously we itemize. So we get to itemize another $5k with our current plan. At a 20% tax rate between fed and state we save $1k on taxes. Our medical expenses are insane (mostly just insurance) but at least we get some tax break.

For 2008 you can put $5800 in an HSA, tax-free. For us that would only be a $870 saving. Because in California they do not recognize HSAs. We would lose the state tax benefit. & though we would put in more we would get a smaller tax break than we usually do.

OF course, our insurance premiums go down. But they go down about $3k/year if we take a $3k deductible. Basically if any one of the 4 of us goes to the emergency room this year, or breaks an arm, we're going to pay $3k out of pocket. I think the odds are very high. Which means we'll probably spend $10k on medical this year, as we usually do. Just happened this is the best deal offered to us this year (actually better than we were offered last year). Because our insurance plan is saying they are giving us more benefits and lowering our out-of-pocket max. So we'll take the lowered premiums, regardless. & save the difference for the deductible we likely will pay some point during the year.

We could put %$5800 in an HSA (which we could do if we put our saved premiums, vision, dental expenses, etc. Certainly don't have dental insurance and that is part of our $10k bill for the year). But we would get a smaller tax break than otherwise, and a more complicated tax return. (Which I prepare but it's a PITA, for sure!!!!! A factor that needs to be considered).

We could put the $5800 in throughout the year and earn the whopping 2%-3% returns most HSA offers (I certainly would not invest the money we would likely need in riskier mutual funds). & most the
HSas charge fees. $25/year at the minimum (which wipes out much of that 2% interest).

So in our case, since it looks like it is also a pain to pull money out of many of the HSAs (certainly not all - but the more convenience the more expensive the account is - keep in mind). If I am going to put in $5800 and use $5800 this year it makes little sense.

I would be far better off investing the money in our savings account, earning 4.5% and paying no fees. I am going to take it out as quickly as I put in, most likely. & still get to deduct $5k on my tax return and save $1k in fed & state taxes...

So this is my thinking here. There are a lot of factors at play here.

Now, if 12/31/08 comes around and we have not paid one dime of our deductible... (LEt me tell you, I am not holding my breath here). Then I would consider shifting the $3k deductible for '08 into an HSA. I am just not sure if it would do any good. We would not be able to deduct anything for itemizing then. So would I be better off keeping it in my bank account and deducting the $2k we did spend on dentists and such? (Itemize that deduction). At least I know I could grow the $3k easier, with less expenses. There is not a huge benefit there. The taxes saved on the $2k actual expense would be $400. Taxes saved on $3k would be $450. Plus it would greatly complicate things and we would pay STATE taxes on the interest it earned and pay fees to the HSA, etc., etc. We'd save $0 but increase complications GREATLY!!!!! I'd rather pull the money out of my savings account when I need it. No Hassle.

What if we go 2 years with no doctor visits and I could put $5800 into the HSA on 12/31/09?

In that case it might be a better deal. The more we save up the better deal it becomes.

It comes down to the fact that I expect the odds of that to be like 10%. Not in our favor. That deductible will get spent.

What if dh goes to work and suddenly our medical expenses are not more than 7.5%? Than the HSA would win hands down. We'd suddenly be in an atrocious tax bracket (as opposed to 15% state for now. If dh worked we'd be in AMT - you know the rich tax. Apparently the difference between 15% tax rate and "rich" is $20k income. In our case anyway...) So yeah, if he didn't have any decent benefits, then we can put away $5800/year easy, invest it, never touch it, take the stinking tax break. Pay our medical expenses out of pocket (wouldn't pay them out of the HSA because the whole point would be to take advantage of the tax-deferred. They are really not set up to let you easily spend it all every year. The point is to save for future).

Or if I get a huge raise and we start losing our ability to itemize. It might start to make more sense.

So yeah, that's what the situation is for us. There would definitely be some future down the road as I expect our income to rise.

For now all I see is a LOT of effort and PITA for a few pennies maybe saved. But we will definitely have to evaluate at the end of the year. The cool thing about HSAs is you have until 4/15, next year, to decide. I will probably do our tax return and play with it and if we come out ahead with the HSA I can fund it 4/15/09.

HSAs are getting better though. The first year I looked at these I think we would have saved $5k/year on premiums BUT they would only let you put $3k into the HSA AND our hospital had like a $10k out-of-pocket. It was lose-lose-lose. Couldn't even take tax advantage of the savings, and likely would get slammed with a $10k bill if any one of us broke an arm or went to emergency.

This year they say we'll save $3k on our premiums, can put $5800 into an HSA, and our max out of pocket is $3k. $5800 is about our out of pocket for all medical expenses besides the insurance so it seems pretty fair. It's getting better... But then you can see when you look closely there isn't a lot there on the HSA side. I am relieved our insurance is offering a better plan though this year. A much more affordable one. It benefits savers who have $3k in the bank and say sure. I know plenty of people who would think it's a great deal but don't have a dime in the bank and wouldn't save a dime. They'd sink fast. For us, it just may work.

& when dh returns to work we need more tax advantaged accounts. I'll take my IRA any day. But it works for people trying to limit income tax, who have a lot of disposable income. I think we will probably fund some of an HSA going forward, as my income grows or if we go to a 2-income household. We'll see...

I hope with time more banks offer HSAs and they get more competitive. I think that is my biggest peeve right now. Very few financial institutions seem to be offering them. They are expensive and the returns look lousy. But they also have far more choices today than they did 2 years ago. So basically for now I figure I have until 4/15/09 to fund it and I am going to hold out for some better deals.