One of the most commonly confusing concepts for consumers when it comes to health insurance isn’t the insurance policy itself – it’s something called a health savings account, which some people ignore or dismiss because they mistakenly equate an HSA with a regular savings account. There are actually quite a few advantages that an HSA offers compared to a regular savings account, though not everyone is eligible to open an HSA.
It all comes down to your health insurance policy’s deductible limits. If you’ve been offered HSA options from an employer – or you qualify as a sole proprietor or business owner – then you won’t want to overlook the incredible financial incentives presented by HSAs.
What is a Health Savings Account?
In a nutshell, a health savings account helps people save for medical expenses and reduce their taxable income in the meantime. Both health insurance providers and private financial institutions offer HSAs, which you can use for medical expenses with a debit card or check(s) linked to your HSA balance. Employees, employers and self-employed folks all may qualify for an HSA, whereas a flexible spending account (FSA) is restricted to employees.
Eligible medical expenses typically covered by HSAs include:
- Co-pays
- Deductibles
- Co-insurance
- Other medical expenses not covered by your current insurance plan
One of the few things not covered by an HSA is your monthly health insurance premium. Best of all, HSA contributions never “expire” or go away after a certain period of time; you can literally wait decades before deducting from your HSA and it will still be there where you left off.
Who Qualifies for an HSA?
HSA eligibility is almost entirely predicated on whether your health insurance plan qualifies as a high-deductible policy. For an individual in 2019, this means you’re paying at least $1,350 as your annual deductible and annual out-of-pocket expenses don’t exceed $6,750. For families in 2019, this means you’re paying at least $2,700 for your annual deductible and annual out-of-pocket expenses don’t exceed $13,500.
HSA eligibility also depends on you not having medical coverage (Medicaid, Medicare or FSA) through your spouse’s plan and you not being 65+ years of age-eligible for Medicare enrollment (if either of these situations applies to you then you will be ineligible for an HSA).
Tax Advantages of HSAs
Contributions to HSAs occur via payroll deductions from the individual’s gross income, which means contributions occur on a pre-tax basis. The enormous advantage of an HSA comes from the fact that you don’t pay taxes on money going in and, as long as the withdrawals are used for qualified medical purposes, you don’t pay taxes on money going out, either. The same applies to interest/earnings on your HSA contributions – they’re tax-free.
This effectively lowers people’s tax burdens while also helping them save for medical expenses that could come up at any time. Since healthcare is only getting more expensive every year, why not take advantage of the tax and health benefits of having an HSA?
Long-Term Investments with HSAs
Another little-known tax benefit of HSAs comes from their exemption from FICA taxes (Social Security and Medicare). Whereas IRA and 401k contributions are still subject to FICA taxes (they’re only exempt from federal and state income taxes), an HSA is truly tax-free as long as you’re using the funds for medical purposes.
Unlike regular savings accounts and flexible spending accounts, HSAs can be invested into stocks, mutual funds, bonds and other types of investments to generate higher returns and grow your health savings over time.
You can also leave money in an HSA for as long as you want; whereas retirement accounts require that you begin withdrawing by a certain age (typically by 70 ½), you can wait to use your funds until you have a medical bill come up. This alone makes HSAs excellent supplements to any retirement planning strategy since you’re not only saving on taxes but also preparing for the health concerns (and expenses) that come from aging.
How Can You Get the Most Out of a Health Savings Account?
If you qualify for an HSA, then contributing as much as you can to protect your long-term physical and financial health is a no-brainer. Per 2019 figures, an individual can contribute $3,500 annually while a family can contribute up to $7,000 to the HSA.
There’s a high probability that you’ll need to spend at least a few thousand dollars on healthcare at some point in your life – whether for yourself, a spouse or dependent – so opening and contributing to a HSA is one of the most financially smart strategies to protect your health and conquer medical debt before it becomes an issue over the course of your life.
