Is a Health Savings Account (HSA) Right for You?

As healthcare costs in the United States continue to skyrocket, the financial burden has become overwhelming for many. In fact, medical bills were the no. 1 reason that people filed for bankruptcy, per a 2019 study. To try and alleviate those costs, millions of Americans have either set up a crowdfunding account or donated to one to help with unforeseen medical expenses, according to CBS News.

Instead of scrambling to cover medical costs when you or a family member needs treatment, consider being prepared to face these bills with the money you can put into a health savings account (HSA). Learn more about an HSA and why it could be the right option for you.

What Is a Health Savings Account?

A health savings account is much like a personal savings account, except that the funds in an HSA are used for healthcare-related expenses only. You have full control over your HSA and can decide how to allocate the money. In order to qualify for an HSA, you have to be under age 65 and have a high-deductible healthcare plan either on your own or through your employer. High-deductible plans usually have lower monthly premiums and you can use the money in your HSA to pay for deductible expenses.

HSAs and high-deductible plans may not be suitable for everyone, especially if you face high healthcare costs already due to chronic illness or other conditions that require ongoing care. However, they can be great for people who are relatively healthy and only need medical treatment every now and then. Go over your healthcare costs for the past few years to help with this decision.

The Benefits of Health Savings Accounts

Having a health savings account can provide you with several benefits and give you some financial flexibility when you have medical bills to pay. Review some of these benefits so you can make an informed decision about HSAs and if it is a viable option for you and your loved ones.

Funds Contributed to HSAs Are Tax-Free

One of the biggest benefits of an HSA is that the amount you decide to contribute from your paycheck is put in before taxes. You also get to decide how much money you put in, up to the amount allowed by the Internal Revenue Service. For 2021, that amount is:

  • $3,600 for an individual
  • $7,200 for families

If you’re 55 and older, you can also contribute an extra $1,000 per year for a catch-up contribution until you start using Medicare. Contributing that money before taxes could save you from paying more on your federal and state income taxes each year.

Many employers will also offer an HSA match, meaning they will put in money up to a certain amount that matches what you also choose to put in from each paycheck. Keep in mind, that match does count toward the max amount established by the IRS. Some HSAs also earn interest and those earnings are also tax-free.

One important caveat to this, however, is that if you withdraw funds from your HSA for non-medical reasons, you will have to pay income tax on it as well as an additional 20 percent fee. That fee is waived once you’re over 65, but you’ll still have to pay taxes on it.

You Keep All HSA Funds Even if You Change Employers

Another benefit of an HSA is that if you don’t use the money that you save each year, you can rollover that amount. You’re also able to take that account with you if you leave your employer, and that includes the amount they matched while you worked there. This is different from a flexible spending account (FSA), as you lose that money if you switch to a different employer. FSAs also only permit you to rollover a certain amount of money each year, but only if your employer permits it.

Saving for Medical Costs After Retirement

If you start an HSA now, you can begin saving up money for your retirement. Healthcare costs are only going to rise, and if you have money set aside to help alleviate those costs as you get older, then you may feel less stress about seeking medical treatment. It can be difficult to make clearly informed decisions about how much to save in your HSA for retirement, especially since not all healthcare providers are transparent when it comes to sharing costs. That’s why it’s important to save as much in your HSA as you can while you’re still working so that you have more of a safety net to cover any unanticipated costs.

Speak With a Financial Planner About a Health Savings Account

If you’re still on the fence about HSAs, then it may be a good idea to speak with your financial planner about their benefits and how you could save money by enrolling in your employer’s HSA program. Your human resources department may also have valuable resources for you to explore. Either way, the sooner you can decide and enroll, the sooner you can start saving and planning for your future. Contact us today to discuss your retirement plans.

  • Home
  • About
  • Team
  • Services
  • Contact