According to the Kaiser Family Foundation, the average health care deductible for people with employer-provided health care plans rose 256% between 2004 and 2014. Those numbers continue to rise.
Health Savings Accounts (HSAs) can be a key part of your financial strategy to combat those rising deductibles, while helping you to pay for the best medical care possible. With that in mind, we wanted to answer some commonly asked questions about HSAs.
Lesson #1: How does an HSA work?
Health Savings Accounts are privately held savings funds that allow you to put away tax-advantaged money for future medical expenses. They work similarly to a traditional IRA or a 401k in that interest on the account grows tax-free. Money for qualified expenses can be withdrawn as soon as it’s deposited, so the liquidity HSAs provide is key in emergency situations.
Lesson #2: Who is eligible?
HSAs are always paired with High Deductible Health Plans (HDHP), which are becoming more and more common each year. According to a Minneapolis-based HSA firm, in 2017, there are over 20 million HSA accounts in the United States (with matching HDHPs).
You are not eligible for an HSA plan if you don’t have an HDHP, are listed as a dependent on someone else’s tax return, have another form of insurance or are currently on Medicare.
Lesson #3: What are the financial benefits?
By putting a portion of your paycheck directly into a health savings account, you receive an immediate tax deduction. On top of that, anything you withdraw for qualified medical expenses is distributed tax-free.
One of the limitations of an HSA is that there are specific rules for using the account earnings for non-medical needs. If under the age of 65, nonqualified withdrawals are subject to regular income taxes, as well as a 20% penalty tax. However, if you are over the age of 65, your HSA can be used for any reason. Because of this, it’s worth considering maxing out your HSA contributions ($3,400 for individuals, $6,750 for families) each year to take advantage of compounding interest, which could end up adding thousands to your retirement income down the road.
Lesson #4: How is an HSA different from a Flexible Spending Account (FSA)?
Unlike an FSA, money in an HSA can be rolled over year to year and is not controlled by your employer. There is also a lower maximum contribution limit in an FSA ($2,600 in 2017) than in an HSA. However, as we mentioned before, HSAs are only available to people with HDHPs, while FSAs don’t have that same requirement.
Lesson #5: Is an HSA right for me?
There are multiple aspects to consider if you’re thinking about opening an HSA–like how much you should contribute, when to start and how to long to wait before withdrawing. Your financial advisor can be a big help in making these long-term health care decisions as your prepare for your physical and financial future.
This article was originally published on 11/04/17 in the Pioneer Press.
Peg Chromy Webb has specialized in financial consulting for more than 30 years and is a popular co-host of the “Your Money” Radio Show. She is passionate about financial education and shares her expertise on career-building and financial literacy through various charitable endeavors.