One of the many things we have learned from the COVID-19 pandemic is that we should try to be as prepared as we can for the unpredictable. That includes being ready to handle unplanned medical expenses we can incur in the event that we get sick or injured.
A health savings account (HSA) can help you manage your health and wellness financial needs in today's unpredictable world. Not sure how an HSA works? We put together this guide covering 5 benefits of having an HSA to help you decide if an HSA could be right for you.
What is an HSA?
An HSA is a savings account that allows you to set aside money to pay for qualified medical expenses. These medical expenses include deductibles, copayments, coinsurance, and other out-of-pocket costs.
Some important things to know about HSA before exploring the benefits:
You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). (An HDHP is a health plan that only covers preventive services before the deductible.)
There are some other requirements you may need to meet.
When viewing plans in the Marketplace, you can see which are "HSA-eligible."
Some health insurance companies offer HSAs for their HDHPs.
An HSA can also be opened through some banks and other financial institutions.
Benefits of Having an HSA
With an HSA, you can merge your health and financial wellbeing. Let's explore some of the benefits of this program.
Benefit #1: HSAs help offset costs of high-deductible health plans
An HDHP is an insurance plan with a deductible of at least $1,400 for an individual and $2,800 for a family (as of 2021). While healthcare costs continue to rise, more companies are offering HDHPs in their employee benefits packages.
Typically, most HDHPs are connected with an HSA funded by pre-tax dollars deposited into your account. Most employers do this through a payroll deduction. As a result, HSAs have increased in popularity to help pay for eligible medical costs, while also helping employees plan for and cover the high deductibles affiliated with these health plans.
Benefit #2: The Triple Tax Advantage
Contributions to your HSA have what is known as a "triple tax advantage" because you save on taxes when you contribute, as the money grows, and when you withdraw them as well.
Your contribution to your HSA is taken from your payroll deduction; therefore, you don't pay Federal Income Taxes on it. (You can use your HSA for any family member's medical expenses that you claim on your taxes!)
Federal tax-free interest and investment earnings could help you save more for qualified expenses.
Withdrawals are also federal tax-free as long as they are used for qualifying expenses.
Benefit #3: Your HSA has no expiration date
You own your HSA and can keep it as long as you'd like. While you can only open an HSA and contribute funds while enrolled in an HDHP, you can use those funds anytime.
What does this mean for you? Unused funds roll over from year to year and are available to you anytime. You can spend funds from your HSA this year on routine health care expenses or save them for unexpected costs in the future. It doesn't matter if you change jobs, change health care plans or retire. The money in your HSA is yours for life.
When you appoint a beneficiary, the benefits of your HSA will transfer to your heir.
Benefit #4: HSA is adjustable to meet your needs and goals
No two people’s health and wellbeing financial requirements are the same. Therefore, neither will their HSA’s be completely alike as well. With an HSA, you have the flexibility to withdraw as little or as much as you need at a time, and you can use your HSA as needed in a way that meets your individual health and wellbeing financial requirements.
Whether it's your day-to-day needs or long-term goals, the HSA is designed to help you save money and better prepare for future health expenses. This also includes health and wellbeing financial needs that may arise during your retirement, a time when it is common for many people to have a lower income, but incur more medical expenses.
Benefit #5: Grow your money
Something many people may not realize is that you can also invest in an HSA. A study found that only 4% of people’s HSAs in the U.S. included invested funds.
How much you contribute to your HSA depends on your current financial and health situation and long-term goals. For example, if you know you have a costly medical expense coming up, it might be wise to have more liquid assets in your HSA to help pay. If not, it may be smart to invest some of the money.
There is a chance that conservative investing can help your money grow faster than by earning interest alone. This can help you reach your retirement goals earlier or build up your HSA balance to pay for a significant medical expense in the future.
Be sure to see if your employer offers any contribution or match to your HSA, and take advantage of the extra funds if so.
Investing funds is never a sure thing. Since everyone's financial situations are different, we recommend speaking to a financial advisor before investing.
An HSA can be an excellent option for you to consider to better manage medical costs, now or in the future. There are so many great benefits of having an HSA, but we always recommend researching thoroughly to ensure it will work for you!