HSAs: Health Savings Accounts

December 3rd, 2018

 
HSA? Not another acronym! Yup. But an HSA, or Health Savings Account, can be a great way to save money and cover future medical expenses, so they’re worth a look.
 

What is an HSA

An HSA is a type of savings account where you’re allowed to contribute pre-tax money and then use that money to pay for medical expenses not covered by your insurance.
 
Eligible expenses generally cover a wide range of categories – doctor visits, medications, surgeries, X-rays and MRI scans, medical devices, physical therapy, psychiatric care, and even vision and dental expenses, to name just a few. You can’t use it for things like vitamins or vacations (no matter what it does for your health) or to pay your insurance premiums, typically. (Feel free to check out the IRS website for more details.)
 
As you make contributions, your balance can grow from one year to the next, and once you turn 65, you can even take the money out and use it for non-medical expenses (but you’ll have to pay taxes on it then). So HSAs can double as a way to cover medical expenses and as a way to save for retirement (similar to a 401(k) or traditional IRA).
 

Why you would want to open one

Medical care can get really expensive, especially if you have a high deductible insurance policy (which is who the HSA was designed for). Saving up in advance can make a big difference when the time comes and you need the money.
 
The tax benefit will grow your savings faster. You contribute pre-tax money, your account is allowed to grow tax-free, and if you take the money out for qualified expenses, you won’t have to pay any taxes. This can give your savings a huge boost over time.
 
You can invest your HSA savings in stocks, bonds, and funds, allowing you to earn a return on your money, and eventually you can use the money for non-medical expenses once you turn 65 (although you would have to pay income taxes at that point).
 
You can take your HSA with you if you leave your employer and you can roll your balance from one year to the next (unlike a Flexible Spending Account, or FSA, which must be spent).
 

Who qualifies for an HSA

In order to qualify to open an HSA, you need to have a high-deductible health insurance plan (HDHP), which is defined by the government as a plan with an annual deductible of at least $1,350 and an out-of-pocket maximum of $6,650 for an individual. For a family, it’s an annual deductible of at least $2,700 and an out-of-pocket maximum of $13,300. (Amounts as of 2018).

Quick Reminder: The deductible is the amount you’re on the hook to pay before your insurance coverage kicks in and the out-of-pocket maximum is the most you can be on the hook to pay in a single year.

You also can’t qualify for an HSA if someone claims you as a dependent on their tax return or if you’re on Medicare.
 

How to set one up

Some employers offer HSAs as a benefit you can sign up for, so check to see if yours does. Even if your employer doesn’t, you can still set one up on your own. Many financial institutions offer them. Pay attention to fees and features as you compare offers.
 
When you set yours up, you’ll have to decide on your contribution amount. You can contribute up to maximums set by the government. The 2019 maximum contributions are set to be $3,500 for an individual and $7,000 for a family plan. (The 2018 limits were $3,450 and $6,900, respectively.) You can contribute money a few different ways – automatic deductions from your paycheck, automatic transfers from a bank account, or manual transfers whenever you want. Some employers will also contribute money, so be sure to take advantage of that if your employer does.
 
You’ll also have to select what investments you want to hold in your HSA. In general, you’ll want to look for low-fee funds that offer a diversified range of investments. We cover investing in more detail in our core content, starting with the basics.
 

Summary

How your HSA grows will depend on a few factors, like how much you contribute, how often you take money out, and what return you earn on your money, but overall it can be a great way to save for medical expenses and supplement your retirement savings.

 

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