Should you open a Health Savings Account (HSA)? Not surprisingly, the answer depends on many factors. For instance, if you’re in good health and can afford a high-deductible insurance policy, HSAs may offer significant advantages. Think about the following as you consider an HSA:
The plus side
- HSAs can reduce your tax bill. You contribute pre-tax dollars, the money grows tax-free, and you make tax-free withdrawals for qualified medical expenses.
- HSAs can lower health insurance premiums. Because HSAs work in tandem with high-deductible health plans (HDHPs), premiums are generally lower. That’s because you, rather than the insurer, cover more of the costs until the deductible is met.
- HSAs can bolster retirement investments. Some HSAs allow you to invest in mutual funds after the account balance reaches a certain threshold. Because the balances accrue (unlike Flexible Spending Accounts that require you to spend the funds annually), an HSA can grow over time.
- HSAs live on if your insurance changes. “If your employer changes their health plan away from a HDHP, your HSA will continue. You will not be able to contribute to the plan anymore, but can keep the money growing tax free until you need it for an emergency.” – Chris Cicalese, CPA
Possible pitfalls
- Changing insurers can be risky. If you or a family member suffers from a chronic health condition, switching to an insurance company with a high-deductible policy may not be feasible or advisable.
- Out-of-pocket costs will likely increase. The upfront costs of a high deductible can sting. For 2018, the insurance deductible for a family must be at least $2,700 to qualify for an HSA. Although your insurance may cover routine preventative care, you’ll be on the hook for most medical costs until the deductible is met at the start of each coverage year.
- Withdrawal options may be limited. If you withdraw funds for non-qualified expenses before age 65, you’ll be hit with a 20 percent penalty in addition to regular income taxes.
Bottom line? If you have the financial resources to cover out-of-pocket healthcare costs, an HSA can be a great tax-advantaged tool. Just be sure to compare the benefits and pitfalls alongside your own situation.
