Benefits of a Health Savings Account

Read this article to understand how to maximize the value of an HSA account!

Employers are increasingly offering high-deductible health insurance plans, sometimes pushing them on workers. If your company is getting on that bandwagon, you ought to consider signing up for a Health Savings Account, or HSA, which works hand-in-glove with a high-deductible plan. Many firms with high-deductible plans offer HSAs, but if yours has a plan and no HSA, you can get an account on your own at a financial institution.

An HSA is a triple tax-free account that can help you shoulder rising out-of-pocket medical costs. Your money goes into the account before it’s taxed, grows tax-deferred and can be withdrawn tax-free to pay unreimbursed medical expenses, including your deductible and health costs that aren’t covered by your plan.

And here’s the little-known bonus: You can also use an HSA to boost your retirement savings.

Don't, however, confuse an HSA with the similar-sounding health care FSA, or Flexible Spending Account, as nearly 75% of people responding to a recent Fidelity Investments survey did.

While you can use both accounts to pay health bills, there are two big differences: 1) An HSA lets you roll over any money you don’t spend by Dec. 31 and 2) After age 65, you can withdraw money for nonmedical expenses without owing a tax penalty. (Those withdrawals are taxed as income, as with traditional IRAs.) An FSA, by contrast, is a use-it-or-lose it account; if you don’t spend the money you’ve put in before year’s end, it disappears. (Some employers allow a grace period of 2 months and 15 days after the plan year to use up the money.)

To take advantage of an HSA, you can’t be enrolled in Medicare or claimed as a dependent on another person’s tax return and your health plan must be what’s known as a Qualified High-Deductible Plan. That means its annual deductible must be at least $1,250 for individuals, $2,500 for families.

You can change the amount of your contribution to an HSA any time during the year, as long as you don’t go over the annual limit.