10 Reasons to Start a Health Savings Account (HSA)
Opening a Health Savings Account (HSA) is one of the most important things you can do for yourself in the here and now. The benefits to you are both immediate and long term. Here are a few reasons for arranging your health insurance coverage to include this important tool.
You can pay for healthcare expenditures with tax-free money.
The money deposited in this account is tax-free! That’s right, no income tax! The government keeps its hands off it! When you use your HSA debit card to pay for your medical expenses and deductibles, you are paying for it in pre-tax dollars, which is like getting a 20–30% discount on services rendered, depending on your tax rate. Over your lifetime, that’s a huge savings.
You will need to keep records of all of those expenditures with your annual tax filing in case you ever get audited by the IRS. Those receipts are the only acceptable proof to the IRS that you spent the tax-free funds on approved products and services.
Interest earned on your HSA account is tax-free, too.
The interest earned on the money in an HSA is tax-free. Unlike your other banking accounts that generate interest income, the HSA will never send you a 1099-INT. The interest stays in your account until you are ready to use it to pay for your healthcare expenses.
You own your health savings account.
You own the money in your HSA account. It doesn’t belong to the insurance company or your employer and can’t be raided for any other reason by anyone. And unlike Flex accounts, HSA accounts do not have to be used in the same year as the contributions.
Benefits of the HSA account can’t be lost.
Even if you lose your health insurance, the account stays with you. It can’t be taken away if you change employers. This is not a ‘Use it or Lose it’ benefit! The money just rolls over and stays with you for whenever you need it in the future. Even upon your demise, the money is yours and will be distributed to your beneficiary.
A health savings account is a good strategy for retirement planning.
Since the HSA rolls over year after year and there are no limits to how much you can accumulate in the account, the HSA account is a good tool for retirement. After the age of 65, you can withdraw funds from your HSA account penalty-free for any purpose. You will pay income tax on the withdrawal if it is not used to pay for health care, but that tax rate is likely to be lower in your retirement years when your income is lower. And, of course, you can continue to withdraw the money from your HSA account tax-free to pay for medically necessary expenses.
That’s right. You don’t have to use the money for healthcare expenses after you reach retirement age. You can use it to fund that dream vacation that you never had time for while you were working.
Funding it to the maximum allowed is why the HSA has been described as a "Medical IRA."
You become a more informed healthcare consumer.
The insurance plans that qualify you to get all the benefits of an HSA account are called High Deductible Health Plans (HDHPs), so you will be paying the full cost of your care (using the tax-free dollars in your HSA account) until your deductible is met.
All of a sudden, you're looking at what is spent on your healthcare, and that’s a good thing. Most HDHPs have tools that will help you shop around for providers. Not only do they provide some pricing information, but also some measures of the quality of the service provided.
An HSA can reduce stress.
Just being in control of your healthcare can give you additional peace of mind. It reduces the uncertainty of future health expense planning because you know where the money will come from! Plus, knowing that the deductibles will be paid from pre-tax dollars has got to put a smile on your face.
HSAs come with a significant premium savings over traditional health insurance plans.
HSA plans have a higher deductible than other plans, but they come with much lower premiums. This savings is especially apparent to someone who pays the premiums all year long but doesn’t actually go to the doctor or use medical services very often. For this person, the premium can feel like money out the window.
Based on premium savings alone, some HSA owners see 20–40% savings in the cost of maintaining insurance coverage each year. Over the years, a healthy person can save some serious money!
An HSA can be used to pay for any medically necessary service.
Use the HSA to pay for dental, vision, prescription drugs and non-drug over-the-counter medical items. Even if your health insurance coverage doesn’t cover these items, you can use your HSA debit card to pay for them with pre-tax dollars. Over the years, this savings is huge.
Starting January 1, 2011, over-the-counter drugs were no longer considered eligible medical expenses. However, if you get a doctor's prescription for over-the-counter drugs, then you can still use your HSA to pay for the items tax-free and penalty-free. The rule against buying over-the-counter drugs with your HSA does not apply to non-drug over-the-counter items such as bandages or contact lenses cleaner.
You can use it as an emergency savings account.
Some HSA owners pay all their eligible medical expenses out-of-pocket and let the HSA account grow a tax-deferred emergency fund. Keep the receipts and if next year the owner needs emergency cash, he can reimburse himself for the previous year’s expenses up to the total of the receipts and owe no tax.