Why do people open up Health Savings Accounts in conjunction with high-deductible insurance plans? Well, here are some of the compelling reasons why younger, healthier employees decide to have HSAs.
#1: Tax-deductible contributions. These accounts are funded with pre-tax income. Your annual contribution limit to an HSA depends on your age and the type of insurance plan you have in conjunction with the account. For 2015, limits are set at $3,350 (individual plan) and $6,650 (family plan). If you are older than 55, those limits are nudged $1,000 higher.
#2: Tax-free growth. Under federal law, the money in an HSA grows untaxed. Some HSAs even have investment options.
#3: Tax-free withdrawals (as long as withdrawals pay for health care costs). Distributions out of an HSA are tax-free as long as they are used to pay qualified health-care expenses. The is the federal tax treatment, and most states treat HSA distributions in like fashion.
Add it up: an HSA lets you avoid taxes as you pay for health care. Additionally, these accounts have other merits.
You own your HSA. If you leave the company you work for, your HSA goes with you – your dollars aren’t lost.
Do HSAs have underpublicized societal benefits? Since HSAs impel people to spend their own dollars on health care, the theory goes that they spur their owners toward staying healthy and getting the best medical care for their money.
Additionally, the HSA is sometimes called the “stealth IRA.” If points 1-3 mentioned above aren’t wonderful enough, consider this: after age 65, you may use distributions out of your HSA for any purpose, although you will pay regular income tax on distributions that aren’t used to fund medical expenses. (If you use funds from your HSA for non-medical expenses before age 65, the federal government will hit you with a 20% withdrawal penalty in addition to income tax on the withdrawn amount.)
How about the downside? HSA funds don’t pay for all forms of health care. You also can’t use HSA funds to pay for a Medigap policy or Medicare supplemental insurance, in case you are wondering about such a move. In the worst-case scenario, you get sick while you’re enrolled in an HDHP and lack enough money to pay medical expenses.
Even with those caveats, younger and healthier workers see many tax perks and pluses in the HSA. If you have a dependent child covered by an HSA-qualified HDHP, you can use HSA funds to pay his or her medical bills if that child is 18 or younger. (This also holds true if your dependent child is a full-time student 23 or younger or is permanently and totally disabled.)
Who is eligible to open up an HSA? You are eligible if you enroll in a health plan with a sufficiently high deductible. For 2010, the eligibility limits are a $1,300 annual deductible for an individual or a $2,600 annual deductible for a family.
Your employer may provide a match for your HSA. A full or partial match (or other form of employer contribution) can occur. Sometimes this is contingent on an employee’s participation in a wellness program.
In a recent Fidelity survey, 62% of Americans confessed they didn’t understand how HSAs worked. As more and more employers are offering them to employees, perhaps people will become more knowledgeable about them – and their intriguing features.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.