Health savings accounts (HSAs) are like personal savings accounts, but the money in them is used to pay for health care expenses. You — not your employer or insurance company — own and control the money in your HSA.
The money you deposit into the account is not taxed. To be eligible to open an HSA, you must have a special type of health insurance called a high-deductible plan.
Many people who get their health insurance through their employer aren’t aware of the true cost of health care. Employers generally subsidize a majority of the cost so the premium you pay via payroll deduction isn’t even close to the full amount. If you’re curious what this number is, ask your HR department or look for the amount as part of your total compensation package.
The basic premise behind the HSA is pretty simple: you cover the small things like when you get sick and need antibiotics and the insurance will cover the big things like broken bones (after you hit your deductible).
This way you are insuring against things that are unlikely to happen while paying out of pocket for little bumps and bruises here and there without involving a third party like an insurance company.
think about your budget and what health care you’re likely to need in the next year.
If you’re generally healthy and want to save for future health care expenses, an HSA may be an attractive choice. Or if you’re near retirement, an HSA may make sense because the money can be used to offset the costs of medical care after retirement.
In the best case scenario, HSAs work very well if you never get sick. If you never see the doctor, then you can take your employer’s contribution and the monthly premium savings and add it straight to your HSA account every year.
After a few years, you could potentially have a very large nest egg built up that is triple tax free when used for medical expenses. The other cool thing about HSAs is the money stays with you (not your employer) and you can use it at any point in your life. So even if you’re the model of perfect health right now, you can invest that money for 30-40 years and use it when you’re old and gray. Money in your HSA can even be applied to deductibles and co-pays if you decide to switch back to a traditional plan in the future.
On the other hand, if you think you might need expensive medical care in the next year and would find it hard to meet a high deductible, an HSA might not be your best option.
HSAs might not make sense is if you have some type of chronic medical condition. In that case, you’re probably better served by traditional health plans since your care is being subsidized by other members who don’t get sick as often. HSAs might also not be a good idea if you know you will be needing expensive medical care in the near future. The HSA works with your health insurance – it doesn’t replace insurance.
When you have a copay, you know how much it will cost to visit the doctor but it can be difficult to find out the cost of medical care when you are paying yourself. Also, the desire to keep money in an HSA may prevent some people from seeking medical care when they need it. Plus, if you take money out of your HSA for non-medical expenses, you will have to pay taxes on it.
| HSA POSITIVES | HSA NEGATIVES |
| Sets money aside for health expenses and you don’t pay taxes on it. You can either have your employer take it out of each paycheck for you, or deduct it from your taxes at the end of the year. | You can’t use the money for anything else besides healthcare once it has been assigned to your HSA account, or you pay taxes on it. |
| Can be used for doctor’s visits, chiropractors, personal care items like bandages or allergy medicine you buy over the counter. | Have to set up an account with a third party bank like Fidelity or |
| Money rolls over from year-to-year. It’s always yours, you don’t have to scramble to use it in December or give it back if you change jobs. | You might be surprised by a health expense and not have enough money in your account yet to cover it. |
| Usually, you would get a debit card from that account so it easy to spend the money and keep it separate from other money | It’s challenging to plan for healthcare expenses because it can be hard to find info |
If your employer doesn’t set up an HSA for you, you can set one up privately and either have your employer deposit pre-tax earning into it with a direct deposit, or you can fund it yourself. In either case, be on the lookout for charges and fees from the bank holding your account.
Leave a Reply