Getting ill is bad enough on its own. Struggling to pay medical bills and ending up with oodles of debt adds to the burden, and although we don’t want to think about getting seriously ill, making provision for that contingency is a wise move. Unfortunately, medical insurance plans with comprehensive cover are extremely costly, and not everyone can afford them. That’s when Health Savings Accounts (HSAs) can save the day.
In this guide...
What Are Health Savings Accounts?
Health Savings Accounts are typically linked to health insurance plans with a high deductible. Once you’ve paid the deductible out of your HSA, the insurance kicks in and covers the rest. Although this type of plan doesn’t give you absolute security, it’s a whole lot better than nothing.
Who Is Eligible for an HSA?
First up, you need to have signed up for a High Deductible Health Plan (HDHP), as you can imagine the lower cover also means that you pay lower premiums. The HDHP doesn’t cover preventative health care costs, but it is there when you suffer an injury or illness. However, it won’t pay out until you’ve met your deductible amount, and that’s where your HSA helps out.
To open a health savings account, you need to:
- Have HDHP coverage
- Not have other, more comprehensive forms of coverage
- Not be enrolled in Medicare
- Not be listed as dependent on another person’s tax return
What Are the Benefits of Having an HSA?
Although it’s great knowing you’ve got some money salted away in case you need to cover health care costs, there are several incentives and advantages that come with Health Savings Accounts. The best of all of these are the triple tax benefits.
- Your contributions are deducted before you are taxed on income. That’s a big benefit. Your contributions are exempt from Federal tax, and most States also deduct your HSA contributions from your taxable income.
- Withdrawals are also tax-free. When you use your HSA money on cover health care, the withdrawal isn’t taxed.
- Income on the account is tax-free. For example, you’ll be earning interest on your HSA savings. That income isn’t taxed and that helps you to grow your savings faster.
- Other parties can contribute. Your employer can add a contribution to your HSA, and so can friends and family.
- Your payments roll over from year to year. It’s just like a regular saving account. If you don’t use your savings during the year, the money stays in your account and continues to grow.
- It remains yours even when circumstances change. If you change your insurance provider, get a new job, or retire, you still get to keep the money you’ve saved.
- There are self-directing options available. Banks use money from Health Savings Accounts to invest in a mutual fund. If you think you can invest your money in a smarter way, certain HSAs allow you to choose where your investment goes.
- You can use it like an IRA when you reach retirement age. Suppose you’ve been saving for decades and have more money than you’ll ever use on healthcare in your HSA. What then? After retirement age, you can withdraw funds to use as you please. There is a tax on the withdrawal, but your money has been growing tax-free for all the years it was invested.
The Bottom Line
If you are in good health and are not expecting to have any big medical expenses, an HSA will be right for you. However, if you expect hefty medical expenses or have an unexpected misfortune, the high deductible could turn out to be a problem for you.
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