The Usefulness of Health Savings Accounts
Using an HSA to bolster your personal finances.
Health Savings Accounts (HSAs) can be a great tool for many individuals looking to bolster their personal finances. HSA's are tax-advantaged savings accounts that are specifically designated for future medical expenses. They are available to individuals who are enrolled in a high deductible health insurance plan (out of pocket max of at least $6,900 and a minimum deductible of $1,900), are not enrolled in Medicare, and are not claimed as a dependent on someone else’s tax return (i.e. a parent). HSAs are often described as being triple tax-advantaged because the contributions to an HSA are tax deductible, withdrawals to pay for eligible medical expenses are tax exempt, and the interest and investment earnings within the account are tax free.
Below are some more details on the benefits and possible drawbacks of utilizing an HSA:
-Tax deductions: For 2020, contributions of up to $3,550 for individuals and $7,100 for families can be made to an HSA account. These contributions are then deductible from taxable income.
-Investment options: Most HSA providers allow participants to invest the funds within their account through a variety of investment options. This allows your HSA balance to grow while it is not needed. There are however minimum HSA balance requirements at many providers that must be met in order for you to be eligible to invest the funds. Additionally, the available investment options will vary from provider to provider.
-Employer contributions: Many employers contribute to HSAs as a part of their employee benefits program, similar to how they contribute to employee retirement plans.
-Flexibility of use: Many medical related expenses are eligible for HSA use. For instance, in the past two years I have used my HSA to pay for dental work and for blue light filtering computer glasses. Other eligible expenses include prescriptions and quick care provider costs.
-Retirement benefits: If you have an HSA, the balance can be cashed out at age 65. This withdrawal will be taxed as ordinary income, but you are then free to use it for whatever you want. If you had frequently contributed to an HSA and invested the funds in the account, your balance may have steadily grown over time and could provide another source of funds to draw on in retirement.
-Higher out of pocket medical costs: HSAs are only available for those in a high deductible plan so, if you have one, you will be paying higher out of pocket expenses before insurance kicks in than if you were enrolled in other types of plans. This can be a negative if you have frequent medical expenses or a very large one-time expense.
-Penalties and fees: If you use your HSA for ineligible expenses, you may be charged penalties. In addition, most providers charge maintenance fees while the money is sitting in the account and not being used.
-Market risk: By investing the funds within an HSA, you expose yourself to market risk and the risk of suffering losses. For this reason, it is important to assess your ability to take risk and your ability to suffer different degrees of losses within your HSA. Factors to assess before deciding how much HSA investment risk to take on may be the size of your HSA balance and your level of emergency savings elsewhere.
Ultimately, HSAs can provide many benefits for individuals that are enrolled in high deductible health insurance plans. The tax benefits, investment opportunity, and dedicated savings for future medical expenses offer individuals a great way to bolster their financial plan. Below is a link to Morningstar's 2019 assessment of top HSA providers: