Is an HSA Right for Me?
A Health Savings Account (HSA) is just what it sounds like: A savings account you can contribute to and use to pay for qualified medical and dental expenses. But it also offers special tax advantages.
Healthcare costs are a major component of your financial plan.
HSAs are typically offered in conjunction with a High-Deductible Health Plan (HDHP), which is a healthcare plan with a deductible of $1,400 for an individual, or $2,800 for a family. With a HDHP, you have to pay more out of pocket before your insurance plan starts to cover medical expenses, so HDHPs usually have much lower monthly premium costs than traditional health insurance plans.
For 2021, the IRS allows you to contribute up to $3,600 per year to an HSA for individuals, and up to $7,200 for families. It is important to note that joint HSA accounts are not permitted. HSAs are only available on an individual basis, which means there is only one account owner and one taxpayer contributing to the account.
Your employer can also contribute toward your HSA.
HSA funds can be used to pay toward your deductible as well as healthcare-related expenses, such as doctor and prescription copays, and other qualifying medical purchases.
An HSA might be right for you if you’re generally healthy and rarely get sick. Because the HDHP offers lower insurance premiums in exchange for a high deductible, you can save on monthly premium payments, while investing into an HSA account you don’t plan to have to tap into much. With this strategy, you could save the healthcare funds you don’t need to spend now, so that when you do start to experience a decline in your health, you’ll have savings and investments at your disposal.
The Advantages of an HSA
The tax benefits of HSAs are many: Contributions are usually made by pre-tax payroll deduction, which means the funds are not subject to federal income tax, or in most cases, state income tax. Contributions made with after-tax dollars are deductible from your gross income on your tax return. And withdrawals are not typically subject to federal or state (in most cases) taxes as long as you use the funds to pay for qualifying healthcare expenses.
In addition, any account growth in interest or earnings is tax-free.
Because of its unique tax advantages, an HSA could be attractive to those in higher tax brackets, especially big earners over the age of 50, who can afford to make the full allowable maximum contributions to an HSA account.
HSA accounts are also pretty easy to use. Most HSA administrators issue a debit card you can use like a credit card at eligible merchants to pay for qualifying expenses, like prescriptions at the pharmacy, copays at the doctor’s office or hospital bills you receive in the mail (in which case you would call the billing department and pay by phone using the card info).
You can also submit a claim for reimbursement of funds you spend out of pocket – for example, if you forgot your HSA card and paid cash for first-aid supplies.
Ultimately, by contributing to an HSA account, you are pre-paying, with tax savings, for healthcare expenses and medical supplies. The IRS maintains a living document outlining eligible expenses (as well as ineligible expenses), which range from addiction and smoking-cessation programs, chiropractic and acupuncture therapy, and medical devices to pregnancy test kits, Medicare premiums and eyeglasses.
How are HSAs Different from FSAs?
A common question we’re asked at Scarborough Capital Management is how HSAs are different than FSAs?
Unlike an FSA, which has a use-it-or-lose-it caveat, the unused funds in an HSA don’t expire and won’t be forfeited if not spent by a certain date. Funds roll over year after year. For this reason, HSAs can be a great way to put money aside for the future, when you may need surgery, hospitalization or long-term care, and your healthcare expenses might be considerably higher.
In addition, your HSA is owned and controlled by you, and it goes wherever you go, regardless of whether you change jobs or retire. With an FSA, you typically lose any unspent funds if you leave your employer or decide to retire.
FSAs and HSAs are mutually exclusive, meaning if you have one type of account, you can’t have the other.
After you turn 65, you can withdraw funds from an HSA account you own for any reason without penalty (there is no longer a healthcare-related requirement for the withdrawal). However, you will be responsible for paying state and federal income tax on the amount.
When an HSA is Not for You
An HSA may not make sense for someone who has chronic health conditions, like diabetes or cancer, or who might require expensive medical care in the next year or two, because of the high deductible you pay before health insurance coverage kicks in. In these cases, you’d be better off with a traditional health insurance plan, which may have higher premiums but offers lower deductibles and copays.
If you think you might struggle to have sufficient funds to cover your high insurance deductible while also making the maximum HSA contributions, an HSA might not be for you either. Even if you’re healthy and don’t get sick often, you have to be able to pay the deductible in case you do get sick or injured.
An HSA might work for you or your family if you don’t get sick often, you have a high income and you’re seeking tax-advantaged ways of paying healthcare expenses. If you’re thinking about getting started, talk with your financial advisor about how these types of accounts can help you.
For more than 30 years, Scarborough Capital Management has been helping busy people make the most of their money. We offer affordable 401(k) management services plus full-service financial planning and wealth management to help you reach your financial goals now and in the future. For more on what this looks like, schedule a no-obligation conversation today.