How an HSA Saves You Money

By Matt Bell on 28 March 2016 0 comments

Health insurance is expensive and confusing. There are many different types of plans to choose from, each with different monthly premium costs, co-pays, deductibles, and more. To a great degree, though, the choice comes down to a high-premium/low-deductible policy or a lower-premium/high-deductible policy.

Especially for those who don't tend to use a lot of medical care, high-deductible health plans (HDHP) are increasingly popular. Not only are the premiums relatively low, but the policies usually require little or no out-of-pocket costs for preventative services, and qualifying plans can be paired with a uniquely tax-advantaged health savings account (HSA).

Let's take a closer look at that last benefit: health savings accounts.

HSA Rules of the Road

Only certain health insurance policies enable policyholders to open a health savings account. In 2016, individual plans must have an annual deductible of at least $1,300; family plans must have a deductible of at least $2,600. Holders of such individual policies may use an HSA to set aside a tax-deductible $3,350; family plan holders may save $6,750. Those age 55 or older can add another $1,000.

Of course, opting for an even higher deductible than those minimum thresholds will lead to lower premiums. The money you save on insurance can be used to fund a health savings account.

What Expenses Can Be Paid With HSA Money?

HSA dollars may be used to cover deductibles, co-pays, prescription drugs, eye care, dental care (including braces), chiropractic treatments, counseling, and more.

HSA money can even be used to pay your health insurance premiums if you are unemployed, including continuation coverage (COBRA) through a former employer, and a portion of the premiums for long-term care insurance.

For a complete list qualified medical expenses, read IRS Publication 502.

Where Can You Open an HSA?

A number of banks, credit unions, health insurance companies, and even some investment brokers and individual mutual funds offer health savings accounts. Your employer may have a relationship with an HSA provider, but you are not obligated to use that one.

Look for an HSA "custodian" that charges minimal or no fees, has a low minimum balance requirement, provides a debit card to make it easy to tap your HSA funds, and pays a generous interest rate. Depending on your balance, you should be able to find a provider paying at least 1%. Some also allow you to invest your HSA money.

You can shop for a provider via HSARates.com and HSA Search.

Typically, you'll find the best rates at online and out-of-state financial institutions, including credit unions — many of which make it easy to become a member via a small charitable donation.

Extra Advantages of an HSA

One significant benefit of a health savings account is that unused balances can be carried over from year to year. This differs from flexible spending accounts (FSAs). While the IRS now allows FSA holders to use up unspent funds a couple of months into a new year and even continue to carry $500 forward, HSA rules are much more lenient.

Any HSA money left unused at the end of one year can be carried into the next. If you still have a balance after turning 65 and want to use the money for non-medical expenses, your HSA will work just like a traditional IRA. The money you contributed was tax-deductible, earnings grew on a tax-deferred basis, and now the withdrawals are taxable. On the other hand, if you continue to use your HSA funds for qualified medical expenses, the account will become something of a super IRA. The money went in on a tax-deductible basis, grew on a tax-free basis, and now the withdrawals are tax-free as well. It doesn't get any better than that!

Are You a Good Candidate for a Health Savings Account?

In a perfect world, you would be able to predict your family's future medical needs and choose the most cost-effective health insurance plan accordingly. Absent that, the best you can do is to use history as your guide. Does your family tend to spend a lot on health care, or a little?

If have a track record of fairly light medical expenses, a high-deductible health plan paired with a health savings account may be right for you. An HDHP policy will keep your premiums relatively low. An HSA will enable you to build tax-advantaged savings for out-of-pocket medical expenses — whether you incur those costs this year or many years down the road.

Are you taking advantage of an HSA?

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