Health Savings Account – The Truth About HSAs

The Truth About Health Savings Accounts, HSA

With the rising costs of health insurance and medical premiums, a Health Savings Account (HSA) may difficult to fund. In this post, I will spell out exactly what is an HSA and if you should add it to your already thin budget.

HSAs are becoming more popular each year. According to AHIP, as of January 2017, almost 22 million people signed up for a Health Savings Account¹. With that many people enrolled, what are we missing out on?

What Exactly Is An HSA?

A Health Savings Account (HSA) is a vehicle that allows you to use tax-free money to pay for eligible medical expenses. Think of it as a separate saving account that you can use for medical related costs. The money you delegate for an HSA comes out of your income, pre-tax, and goes into the saving account. You then can use this money to pay for medical expenses – again without paying taxes on the money – ever!

What’s The Catch?

what is an hsa
In order to use an HSA, you need to be signed up for a high deductible health plan. These plans are often overlooked because they seem expensive. You are required to pay out of pocket for all medical expenses until you hit a predetermined amount based on your insurance company. For instance, I have a certain threshold I have to lag each year. That means I pay for my medical expenses (out of my HSA funds) out of pocket until I meet my threshold before my insurance coverage kicks in.

Because much of the initial cost is covered by you, high deductible health plans often charge lower monthly premiums.

The Benefits Of An HSA

As previously discussed, the HSA is a pretax saving account you can use for medical expenses. However, unlike a traditional saving account, you can invest your HSA funds in mutual funds while they sit in the HSA. That means your HSA can also work as a tax-sheltered investment fund! As your money earns interest, you do not pay taxes on the interest you gain! Very similar to a ROTH IRA except the money avoids all taxes, unlike a ROTH.

Keep in mind that most plans require a minimum amount of money in your HSA before you can start investing (mine is $2,000).

Use Your HSA For Retirement!

As your money continues to grow in your HSA, it can help you out down the road in retirement. For instance, if you reach the age of 65 and still have money in your HSA, you can draw from the account like a regular IRA. The only caveat is you are required to pay taxes on the amount you take out if the withdrawal is not related to medical expenses.
With the tax-free deposits and the tax-free growth, it would be foolish to ignore the benefits of a health savings account!

Medical Expenses You Can Use Your HSA For

HSA for medical expenses
Health Savings Accounts are very versatile because you can use them for a wide array of medical items. They can be used for office visits and co-pays to include dental, vision, and medical. In addition to your usual medical bills, you can also use your HSA to pay for prescription medication or over the counter medication such as Tylenol and Advil!

To verify what is covered by your HSA, be sure to contact your provider if you are unsure. You can be hit with additional taxes and penalties if you use those tax-free dollars for items that are not covered.

HSA Contribution Limits [2019]

For 2019, HSA contribution limits have increased to the following:

  • Single Coverage – $3,500
  • Family Coverage – $7,000
  • Catch Up Contributions (Age 55 and older)
  • Single Coverage – $4,500
  • Family Coverage – $8,000

These amounts include any employer contributions as well so keep that in mind when you set up your monthly contributions.

Health Saving Account Ownership

When you set up an HSA, it belongs to you and you alone. If you change job, medical plans, etc. the HSA stays with you and you can continue to use the money it in. However, if you leave a high deductible plan, you will no longer be able to contribute money to your HSA but you can still draw from it.

HSA Maximums

Outside of the yearly maximum contributions, there is no limit to what you can accumulate in your HSA. It is not a “use it or lose it” type of fund so you can watch it grow without worry!

Determine If A HSA Is Right For You

Is a HSA right for you?
There are not many drawbacks to signing up for a health savings account. The only area of concern is the high deductible you are required to pay as part of a high deductible plan. Depending on your medical needs, even a tragic hospital stay will usually only cost you your deductible limit. For me, I have a high deductible – which hurts at first, but insurance kicks in after that.

I have a family of 5 so when I averaged out the math, the high deductible made sense for us. Look over your yearly medical costs and see what you usually spend on your current plan. Use those numbers to compare what an HSA could do for you to determine if it is the right move.

As far as contributing to your HSA, ensure you have your emergency savings in place before you start funding the HSA. If an unexpected financial issue comes up, you can not use your HSA funds for non-medical expenses. Your cash emergency fund of $1,500 – $2,000 should be your first priority before your HSA.

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Comment below if you have any experience with an HSA and how it has worked for you. We currently use an HSA and it has been beneficial for us but I would love to hear your experiences! Also, please subscribe below to get all my latest posts. You work too hard to be this broke!

-Ryan

what is an hsa health savings accountAll you need to know about health savings account HSA

About The Author

Ryan Luke

Ryan Luke is a father of three, husband, financial coach, and full-time police lieutenant. His inspirational story about his struggle to make ends meet, to paying off his home in less than 10 years, has been featured on MarketWatch and other media outlets. To learn more about Ryan or to send him a message, visit his contact page here.

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