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As the cost of healthcare in general -- and health insurance specifically -- continues to climb, it's refreshing to find one type of health coverage that's so good at saving people money. Health savings accounts (HSAs) are one of the best innovations in health benefits to arrive this century.
The concept behind the HSA is simple, really: It's a tax-advantaged account set up with a trustee that holds money you set aside for the purpose of paying for future medical expenses. Consider the following HSA features and think about whether opening an HSA would benefit you.
1. You save money on insurance premiums
HSAs are paired with high-deductible health plans (HDHPs), which typically have much lower premiums than comparable insurance plans with small deductibles. The idea is to use the money in your HSA to pay for medical expenses until you hit your deductible for the year, at which point the insurance plan kicks in and starts covering your costs.
2. Contributions are tax-free
Any contributions you make to your HSA are fully deductible, up to the annual maximum ($3,400 for individual plans and $6,750 for family plans in 2017). What's more, you can claim this deduction whether or not you itemize. If your employer makes contributions to your HSA, you don't have to declare those contributions as income on your tax return and therefore don't have to pay tax on them either. Note that employer contributions count toward the annual limit, however, so you'll need to reduce your own contributions accordingly.
3. Qualified distributions are tax-free
If you spend your HSA funds on qualified medical expenses, then you don't have to pay taxes on your withdrawals either. "Qualified medical expenses" include anything that would be accepted under the medical expense deduction rules. If you later switch from your HDHP to an insurance plan that doesn't qualify to be paired with an HSA, then any eligible distributions you make afterwards still aren't taxed.
4. You can keep the money
If you faithfully pay your insurance premiums throughout the year and never visit the doctor or buy any prescriptions during that time, does the insurance company give those premiums back to you? Not a chance. But if you put money into an HSA and don't have any medical expenses, the money just keeps sitting there until you need it. Once you hit age 65, you can withdraw the money from your HSA at any time for any purpose without paying any penalties on the withdrawals (though you will pay income tax on withdrawals not used to cover qualified medical expenses). Thus your HSA can act as a supplemental retirement account.
5. The account stays with you
If you change employers, change health plans, retire, or go through any other major life changes, your HSA will stay faithfully by your side. You won't need to reopen, close, or roll over the account to keep using it. If you die, the HSA will be transferred to your designated beneficiary. If said beneficiary is your spouse, the account becomes his or her HSA; for anyone else, the account stops being an HSA, and its assets become taxable to the beneficiary.
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6. You can make money on your contributions
HSAs are commonly set up as checking or savings accounts, but many HSA providers offer other options, including mutual funds and other investments. Obviously, an HSA mutual fund account would have a higher degree of risk and volatility than an HSA savings account, but you also have the chance of far more significant returns than the tiny bit of interest paid out on an HSA bank account.
Setting up an HSA
You're qualified to have an HSA account if you meet all the following criteria:
- Your health insurance plan has an annual deductible between $1,300 and $6,550 for individuals or between $2,600 and $13,100 for families.
- You don't have any other health insurance coverage, including Medicare.
- You can't be claimed as anyone else's dependent for tax purposes.
Many banks and brokerages will set up HSAs at your request, but check the fees and conditions carefully before you pick one -- there's a lot of variability in the HSA marketplace.
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