Health Savings Accounts (HSAs) - Advantages and Disadvantages
You may be considering opening a Health Savings Account, or HSA. This is a special account that you can use along with a high deductible health plan. You can make tax-deductible contributions to the HSA, then with draw from it when you need money for medical expenses.
Certain criteria are required for contributing to an HSA. First, your health insurance must be considered a qualified high-deductible health plan. This type of plan, unlike most other types of health insurance, pays for nothing except preventative care until you meet a deductible, which is relatively high. As an individual, you have a limit of $3000 that can be contributed to a Health Savings Account, as of 2009. For a family, the limit is $5950. There are also catch-up contributions available for those over 55. Your employer may set up a system where you contribute to the HSA through payroll deduction, placing the money into the account on a pre-tax basis.
An HSA works a lot like a bank account. You can withdraw money using checks or a debit card, and you make deposits to the account. The account can also be linked to a brokerage account, allowing you to invest in mutual funds within the account. You can usually move this account from bank to bank, at your choosing, but if your employer adds their own funds to your account you may be limited in your choices.
Let's first look at the advantages of a Health Savings Account. First, the HSA allows you to spend money on medical expenses tax-free. You can contribute money on a tax-deductible basis and then spend it tax-free on medical expenses. If you have an employer that gives a percentage subsidy to your health insurance plan, the insurer's contribution gets the same benefits. So if you contribute $500 to your account and your employer covers $1500 (75%), you can take advantage of the full $2000 in your HSA.
Another advantage of an HSA is that you can use it as a vehicle for retirement savings. If you are currently maxing out your other retirement accounts, you can use the HSA as an opportunity for further tax savings. With this plan, you will not withdraw from the HSA until you retire. You would theoretically keep savings for medical expenses in a taxable account, and pay your medical expenses out of pocket from this account, not touching your HSA. In this scenario, since you have run out of vehicles for your money to grow tax-free, it makes sense to take money out of the account that will be subject to the greater tax liability.
The main disadvantage of an HSA is not in the account itself, but can come from the high-deductible medical plan that is linked to it. If you have very low medical expenses year after year, the high deductible will not matter - the HSA is still your best bet. However, if you have yearly medical expenses that come close to the deductible on the medical plan, you might be better off without the HSA. Keep in mind that even with a high-deductible plan, insurance will usually cover catastrophic high medical expenses that go way over the deductible amount. The disadvantage comes from when you find your expenses close to the deductible limit on a year-by-year basis. In this case, you should see if you can save money by going with a conventional health plan instead.
Certain criteria are required for contributing to an HSA. First, your health insurance must be considered a qualified high-deductible health plan. This type of plan, unlike most other types of health insurance, pays for nothing except preventative care until you meet a deductible, which is relatively high. As an individual, you have a limit of $3000 that can be contributed to a Health Savings Account, as of 2009. For a family, the limit is $5950. There are also catch-up contributions available for those over 55. Your employer may set up a system where you contribute to the HSA through payroll deduction, placing the money into the account on a pre-tax basis.
An HSA works a lot like a bank account. You can withdraw money using checks or a debit card, and you make deposits to the account. The account can also be linked to a brokerage account, allowing you to invest in mutual funds within the account. You can usually move this account from bank to bank, at your choosing, but if your employer adds their own funds to your account you may be limited in your choices.
Let's first look at the advantages of a Health Savings Account. First, the HSA allows you to spend money on medical expenses tax-free. You can contribute money on a tax-deductible basis and then spend it tax-free on medical expenses. If you have an employer that gives a percentage subsidy to your health insurance plan, the insurer's contribution gets the same benefits. So if you contribute $500 to your account and your employer covers $1500 (75%), you can take advantage of the full $2000 in your HSA.
Another advantage of an HSA is that you can use it as a vehicle for retirement savings. If you are currently maxing out your other retirement accounts, you can use the HSA as an opportunity for further tax savings. With this plan, you will not withdraw from the HSA until you retire. You would theoretically keep savings for medical expenses in a taxable account, and pay your medical expenses out of pocket from this account, not touching your HSA. In this scenario, since you have run out of vehicles for your money to grow tax-free, it makes sense to take money out of the account that will be subject to the greater tax liability.
The main disadvantage of an HSA is not in the account itself, but can come from the high-deductible medical plan that is linked to it. If you have very low medical expenses year after year, the high deductible will not matter - the HSA is still your best bet. However, if you have yearly medical expenses that come close to the deductible on the medical plan, you might be better off without the HSA. Keep in mind that even with a high-deductible plan, insurance will usually cover catastrophic high medical expenses that go way over the deductible amount. The disadvantage comes from when you find your expenses close to the deductible limit on a year-by-year basis. In this case, you should see if you can save money by going with a conventional health plan instead.
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