Is An HSA Right For You?

At first glance, an HSA is like any other kind of savings account: It’s a safe place for your money to grow.
By Travis Ryan
Updated Nov 4, 2020
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If you’ve wondered about the smartest way to store your money, you’ve realized that the right choice depends on your needs. Any funds that don’t go into necessary and immediate expenses can land in a savings account, but different types of accounts come with different perks and drawbacks. Keep reading to find out if a Health Savings Account might be right for you.

What Is a Health Savings Account (HSA)?

At first glance, an HSA is like any other kind of savings account: It’s a safe place for your money to grow. However, an HSA can be a particularly helpful type of savings account to have when it comes to medical expenses. If medical expenses are a routine part of your life, this type of savings account is something you should keep on your radar.

The big difference between an HSA and a standard savings account is that the money that goes into your HSA is untaxed. This means the full amount goes right into your account before taxes are even considered. Then you can use the untaxed funds you’ve saved up to pay for medical expenses like deductibles, copayments, and coinsurance. Since you never paid taxes on the money that went into your account, you’ll have more money to cover your healthcare costs.

The catch is that you’re only eligible to contribute to an HSA if you have a High Deductible Health Plan. 

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What is a High Deductible Health Plan (HDHP)?

A deductible is the amount of money you’ll pay before the insurance company starts pitching in. HDHPs offer lower premiums, but they require higher deductibles for health services. Your plan will outline minimum deductibles and maximum out-of-pocket costs. 

In 2020, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family. The maximum out-of-pocket costs are $6,900 for an individual and $13,800 for a family. Individuals can contribute up to $3,550 to their HSA, while families can contribute up to $7,100.

Pros and Cons of HSAs

HSAs and Tax-Related Benefits

An HSA can reduce the amount of money you lose to taxes, which lets you keep more of your paycheck for your own expenses. These are some of the key benefits of HSAs in terms of taxes:

  • Contributions are pre-tax. You can choose to send a portion of your paycheck to your HSA before any federal taxes come out. Any money you allocate to your HSA is also exempt from state taxes in most cases. These funds won’t count toward your gross income.

  • Earnings and withdrawals are not taxed. You can trust that the money you put into your HSA will grow tax-free. As long as you use the money for qualified medical expenses, withdrawals from your HSA will be exempt from federal and (usually) state taxes as well.

  • After-tax contributions are deductible. You’re not limited to pre-tax dollars when it comes to HSA contributions. If you decide to contribute $20 out of your after-tax paycheck, you can deduct the contribution on your tax return.

Non-Tax Advantages

Not all of an HSA’s advantages deal with taxes. Here are some additional positives that come with HSAs:

  • Portable, Convenient Savings: Your HSA isn’t stuck with a specific employer or health insurance plan; you’ll still have access to your money down the road, even if things change. You’ll typically get a debit card with your HSA as well, so making payments with the account will be quick and easy.

  • Open Contributions: It may be your account, but you're not the only one who can contribute to your HSA. Employers and family members alike can make contributions, but they’re still limited to the aforementioned maximums for individuals ($3,550) and families ($7,100).

  • Rollover Money: You won’t lose any of your HSA money at the end of the year, so you don't have to worry about going through it by a certain date. Instead, it’ll all roll over and remain accessible throughout the following year.

  • Lots of Qualifiable Expenses: You can only use funds from your HSA for eligible expenses, but there’s a long list of expenses that qualify. They’re not limited to severe or pressing concerns either; you might use HSA money for vision or dental health services.

Potential HSA Drawbacks

Unfortunately, an HSA isn’t perfect. There are a few drawbacks to this kind of savings account that you should know about before making contributions:

  • Taxes, Penalties, and Fees: HSAs can be advantageous from a tax standpoint, but not if you use your account improperly. Any HSA funds used for non-qualified expenses before the age of 65 will be subject to taxes as well as a 20% penalty. Depending on how you set up your HSA, you may be subject to other charges, such as maintenance and per-transaction fees.

  • HDHP-Required: You must be enrolled in a High-Deductible Health Plan (HDHP) in order to open a Health Savings Account. An HDHP isn’t necessarily right for everyone, as it can mean high out-of-pocket costs.

  • Record-Keeping: If you’re the type of person who has trouble staying organized, consider the record-keeping associated with an HSA. You’ll need to keep your receipts as proof that your funds were used for qualified expenses. If keeping track of receipts isn’t your strong suit, this could turn into an issue.

  • Savings Pressure: It’s nice to have a healthy savings account for medical expenses in case emergency strikes, but don’t avoid using it just to keep it growing. Some people will avoid medical treatment in order to continue filling up their HSA, which is both counterintuitive and dangerous. 

Is an HSA Right for You?

In many cases, the advantages of an HSA will outweigh the disadvantages—especially if you're already enrolled in an HDHP. An HSA could be an ideal choice if you're looking for a portable savings account that lets you keep more of your money for health expenses. If you don’t like the HDHP requirement or the threat of penalties and fees, on the other hand, then an HSA might not be the way to go. This decision could have a significant impact on your financial future, especially if healthcare makes up a large portion of your usual expenses.

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