Health savings account guide: Does an HSA make sense for you?

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health savings account hsa
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Health savings accounts (HSAs) can be a great way to both plan for the future and meet your health care needs right now.

The basic idea with HSAs is that you start with a high-deductible health insurance policy that offers a low premium. Then, taking the money you save in premiums versus traditional health insurance, you can funnel that cash into a tax-free investment account.

Any money in your account that you don’t use for today’s health care expenses grows over time and can be tapped for future health expenses or used for retirement down the road.

HSA Guide: Here’s what you need to know

HSAs can be a real win-win-win situation. You reduce your taxable income by making contributions each pay period, just like you would with a 401(k) at work. The money you earn in interest or investment gains is tax-free, and eligible medical expenses qualify for tax-free withdrawals of the money.

And here’s another nice feature of HSAs: Unlike flexible spending accounts (FSAs) that are “use or lose it” each year, HSAs are “use it or keep it” — that is, the balance in your HSA will roll over from one year to the next.

Of course, if you see the doctor frequently, then a HSA is probably not a good idea for you because you’ll constantly have to open your wallet.

However, if you remain fairly healthy, you can end up with a big pile of cash that grows for the future.

Health savings accounts guide: Table of contents


What are HSAs and how do they work?

Health savings accounts consist of two parts — first up is a qualified high-deductible health insurance policy with a low premium.

With an HSA, you have to decide what you’ll pay out-of-pocket for — essentially acting as your own insurer — and what you want to submit as a claim through your high-deductible insurer.

Typically, that means you’re the one responsible for routine out-of-pocket costs like paying for an office visit — but you also have really good coverage in the event of a major health catastrophe.

To be considered a high-deductible health plan (HDHP), HealthCare.gov says a policy must have a deductible of at least $1,350 for an individual or $2,700 for a family. Remember, that’s the amount you’ll pay out-of-pocket each year before your insurer starts picking up the tab for your health care.

Meanwhile, HDHPs have upper limits, too. Total annual out-of-pocket expenses can’t exceed $6,650 for an individual or $13,300 for a family — provided you stick with in-network care.

The second part of a HSA is a tax-deductible investment account owned by you to which you can contribute to get a current-year tax benefit.

That money you contribute earns interest tax-free if it’s in a simple savings account or makes gains (hopefully) in an investment account. Then you can spend that money down for deductibles and other medical expenses tax-free during the year.

Contribution limits are as follows:

Family status 2018 2019
Single $3,450* $3,500*
Family $6,900* $7,000*

* You can make a $1,000 annual catch-up contribution once you’re 55 or older. 

Your employer may also contribute money toward your HSA investment account toward those annual limits. But the investment account is entirely yours to keep either way.

As previously mentioned, withdrawals for eligible medical, dental and vision expenses are tax-free. According to the IRS, this is a partial list of eligible expenses:

  • Chiropractor services
  • Dental services
  • Diagnostic devices
  • Surgical expenses
  • Fertility treatments
  • Hearing aids
  • Home care costs
  • Laboratory tests
  • Long-term care costs
  • Prescription medications
  • Nursing services
  • Psychiatric care
  • Eye exams, glasses, and contact lenses
  • Medical devices such as crutches

See the full list of eligible expenses here.

Although HSAs are tax-free at the federal level, some states do tax contributions to HSA accounts. Speak with a tax professional to understand how an HSA would work best with your unique situation.

Finally, you can withdraw money for any non-medical expense anytime you like, but the money will be subject to income tax plus a penalty of up to 20%. That penalty is waived after age 65 or if you become disabled.

Investment picks for HSAs

HSAAdministrators.info offers quotes and other info for individuals looking for HSAs and companies looking to start HSA enrollment for their employees.

HSAAdministrators.info is an affiliate of Vanguard and offers a full suite of 23 Vanguard no-load mutual funds — “no load” meaning they have no commissions or additional sales charges. There’s even a simple money market account available for those who like to take the conservative approach.

Another newer option to come to market is from Fidelity Investments, which rolled out its HSA account offerings for individuals outside employer plans in mid-November 2018.

With Fidelity, you’re also getting low-fee options to save for your future needs while addressing the health care expenses of today.

Meanwhile, if you want to cast your net a little wider, Investor’s Business Daily is out with its 2018 list of the best HSA accounts ranked by fees, features and investment options.

The nice thing about any of these options is that you have the freedom to choose a provider like Vanguard or Fidelity to house your HSA investments; you’re not locked into the provider being offered through your employer’s health plan.

To see how much you could potentially save over the years using a HSA, check out this HSA calculator.

Deciding if a HSA is right for you

HSAs can work beautifully in the right situation and money expert Clark Howard is a big fan of them.

“There are some people who don’t like HSAs, of course. They think all of the money is being funneled to the healthy and rich, but I say it’s better than our current system,” Clark says. “Of all the economic output in the United States, 18 cents of every dollar goes to health care. That’s about 50% higher than any other developed country. We are basically sapping our nation’s economic growth with the enormous amount of money going to health care.”

Another important consideration before doing a HSA is to make sure it will do what you want it to do. In fact, the IRS has a list of expenses that won’t qualify for using HSA funds:

  • Baby sitting, childcare and nursing services for a normal, healthy baby
  • Cosmetic surgery
  • Electrolysis or hair removal
  • Funeral expenses
  • Hair transplant
  • Health club dues
  • Illegal operations and treatments
  • Maternity clothes
  • Medicines and drugs from other countries
  • Nonprescription drugs and medicines
  • Teeth whitening
  • Weight-loss programs

HSAs and retirement

We explained earlier how the balance in your HSA will roll over from one year to the next; that means you don’t have to spend the money down by a certain date or lose it like you would with an FSA.

In fact, the beauty of an HSA is that you can even use the money as a supplemental retirement account. Once you reach retirement age, you can use the funds for expenses not paid by Medicare — such as deductibles, co-insurance and even Part B and Part D premiums.

So after age 65, you can think of this money like you would a traditional IRA, which simply means you’re be able to use it for expenses other than medical expenses in retirement!

Another thing to consider with HSAs is the other kinds of expenses you may have in retirement, like long-term care insurance, in-home nursing care, hearing aids and retirement community or nursing home care fees — in addition to regular medical expenses such as eye exams, glasses, teeth cleaning or prescriptions.

And if you need to make modifications to your home to make it more accessible, the IRS says HSAs can be used for these kinds of expenses tax-free as well.

Final thought

The reality is those best served by HSAs are people who are disciplined about putting money aside in savings to fund the HSA — and who are really healthy and who rarely go to the doctor.

If you meet all those criteria, then it’s not just good for you, it’s great for you!

On the other hand, if you struggle to pay your monthly bills, have no savings or have a significant ongoing illness, you probably shouldn’t do a HSA.

More health care stories on Clark.com

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