How and Why You Should Open an HSA
Medical procedures, dental procedures, and general health maintenance can leave quite the dent in your monthly cash flow. Yet, it's not an area in life that you can really skimp on — like when you decide to cut the streaming cost on your Netflix account or skip a night out with friends.
One way to save on your overall medical costs is to open a Health Savings Account, or HSA. Let's look at why this account will save you money, what some of the retirement benefits might be, and how you can open an HSA.
What Is an HSA?
An HSA is a government-regulated savings account you can establish with a High Deductible Health Plan (HDHP) that allows you to save for medical costs — contributions up to $3,500 annually for a self-HDHP, and up to $7,000 for a family plan — that you'll need to pay out-of-pocket.
You receive checks or a debit card that's linked to your account and can use them to pay for eligible medical and dental expenses such as co-pays, deductibles you pay out, equipment, supplies, diagnostic devices, etc. Items such as vitamins and over-the-counter prescriptions that are not prescribed by your physician are not deductible.
How an HSA Benefits You Financially
You may be wondering how an HSA saves you money, given that you're still paying out-of-pocket for your medical expenses from it.
There are several financial benefits to having an HSA:
- Decrease Your Taxable Income: Your contributions made to your HSA are tax-deductible, and employer contributions to your account do not count as income to you.
- Allow You to Save for Current and Future Medical Costs: You don't forfeit unused money or interest earnings at the end of the year in your HSA. This means that you can save for both current and future medical expenditures.
- Pay Medical Expenses with Tax-Protected Funds: Your funds grow federal and state tax-free while in the savings account (except if you live in Alabama, California, or New Jersey). Withdraw funds tax-free if you use them for eligible medical expenses.
- Retirement Planning Benefits: As it currently stands, you are not penalized for using your HSA balance on non-eligible medical expenses if you are over 65 years old (though the withdrawals are taxable income). This means you could potentially use your balance to fund part of your retirement needs.
Do You Qualify for an HSA?
To qualify for an HSA, you must have a High Deductible Health Plan (HDHP) — through an employer or through your own insurance plan. You also cannot be on Medicare, and you cannot be claimed as a dependent on someone else's tax return.
How to Apply for an HSA
Convinced that this is a good tool in your medical budgeting or retirement strategy? The next step is to actually open one.
If your health insurance provider offers the High Deductible Health Plan, then they likely have options for an HSA. Ask them directly, and grab a copy of the enrollment instructions.
Remember, when looking to open an HSA, you want to ask about upfront and recurring monthly fees, how spending/reimbursements work, and if they offer investment options for your money. And above all else, be sure to speak with your financial advisor before making any decisions so that you know which option works best for you.