You’ve probably heard about savings accounts as financial instruments. A health savings account (HSA) is a select type of financial tool that people who are part of a high-deductible health plan (HDHP) have as part of their healthcare coverage. The HSA serves to cover costs that fall outside the coverage limit of the HDHP. They’re quite different from a regular savings account since you can’t withdraw money when you feel like it. However, your savings are invested over time, and you can use it to pay for qualified medical expenses such as over-the-counter drugs, dental, and optician visits. In this article, we’ll delve into how an HSA works, and its benefits and drawbacks as a financial instrument.
How HSAs Work
An HSA is a part of a health plan that comes with a high deductible. Your money can go into your HSA before taxes, and you can use it to pay for healthcare coverage that the provider deems to be qualified medical expenses. HSAs also have value as a financial investment since they allow you to save and invest for retirement. When the fund matures, you can use those funds to pay for general living expenses without penalty.
An HSA usually has a low affordable monthly insurance premium associated with maintaining the account. The money that goes into an HSA is tax-exempt since it enters the HSA before you pay taxes. Typically, if your health coverage doesn’t pay for a particular type of medical service, the HSA may cover those costs. The extensibility of the HSA makes it one of the most attractive parts of investing in an HDHP. Those costs would have to come out-of-pocket in other health plans, but with an HDHP, the HSA covers them.
HSAs and Tax
We already covered how HSAs help you avoid taxes because the money enters your account before you’re taxed. This fact suggests that the taxes you pay would also be less since the total taxable income that the percentage is calculated on would be less. Additionally, any money you take out of your HSA can’t be taxed either. Over time your HSA will gain interest, like any other savings account. This interest is also tax-free. You can think about the money in your HSA as a fixed-deposit account that you can only access for certain medical expenses. When you get to age 65, the fund matures, and you can withdraw all the money you saved into it at that point without penalty. All money you withdraw from the account to pay for health-related expenses remains tax-free.
The Benefits of HSAs
While an HDHP might seem like a risk, an HSA’s benefits can be one of its most significant selling points. From a financial perspective, HSA’s are the perfect saving and investing instrument for people who want a retirement fund and want to benefit from private health insurance coverage. Among the inherent benefits that HSAs offer to its holders are:
- Wide Range of Qualified Expenses: Eligible expenses aren’t just limited to a small list that your provider covers. The IRS has a detailed list of those expenses for which HCA holders can use their funds.
- External Contributions Possible: You don’t have to be the only one contributing to your HSA. Anyone, from your employer to a relative or friend, can add contributions to your HSA. However, since it’s a tax-free instrument, the IRS limits the amount of non-taxable funding that can enter an HSA. In 2019, that limit was $3,500 for individuals and $7,000 for families.
- Portable: HSA funds are linked to you personally. If you retire, change your job, or change your health insurance plan, the HSA still remains available for your current and future medical expenses. The funds in your HSA also roll over from year to year, so that money continues to grow through interest, even if you’re not contributing to it regularly.
- Convenience: Several HSAs offer a debit card like other bank accounts. These allow holders to pay for items such as prescription medicine and other eligible expenses seamlessly.
Some Drawbacks that HSAs Have
HSAs are excellent as a saving instrument, but they also have their inherent flaws. The first and most apparent one is the attachment to the HDHP plan. High deductibles make it challenging to access your healthcare insurance if you need to use it in an emergency. These HDHPs can put a significant financial strain on holders in a crisis. The premiums are much less, but you’re taking a risk by having the high deductible that the HSA may or may not offset.
While the HSA is tax-free for qualified medical expenses, if you decide to use the money in your HSA for unqualified expenses, you are subject to taxes and penalties. Any money withdrawn is taxed, and as a further deterrent to withdrawal, the HSA charges you a 20% penalty on any money you take for unqualified expenses. When the fund matures, you will still need to pay taxes on withdrawn funds, but the penalty is waived.
Depending on your provider, you may also have to contend with fees per transaction or a cost for account maintenance. The prices are typically not that high, but they may add up over time. They will eventually impact the amount of money you save in your HSA. This focus on saving first for your HSA may also affect whether you utilize the HSA for its intended purpose. If you focus on the HSA as a savings account first, you may lose the benefit of having the HSA present to help with medical costs.
Choosing an HDHP with HSA
HDHPs with an attached HSA all come in different flavors. While the benefits are almost identical, there may be more incentives to going with one company over another. But how do you know which company offers the best health insurance plan? My Private Health Insurance gives you a handy tool on our website to check out and compare options for different providers. Come check it out and start making decisions that impact your finances and your health positively today!