Is an HSA Right for You?

Posted May 2016.

If you have health insurance coverage through your employer, you probably feel pretty lucky to have it, even if you’re paying higher premiums and higher deductibles than in the past. But how much better would it be if you could set aside money to pay for current and future healthcare costs, take that money with you when you change jobs, and save on your taxes

Sound good? Then meet the Health Savings Account, or HSA.

An HSA allows those with high deductible health plans to set aside money tax-free to pay for qualified medical expenses, like copays and deductibles, as well as items and procedures that may not covered by your insurance – things like eyeglasses, hearing aids, and dental work. When you withdraw HSA funds to pay for these qualified expenses, the withdrawals are tax-free, too. Plus, the interest or other earnings on your HSA are tax-free. For these reasons, HSAs are sometimes referred to as “triple tax-advantaged” accounts.

Who Can Benefit Most From an HSA?
If you’re one of the millions of Americans who are generally healthy and never even come close to meeting their annual health insurance deductible, an HSA could be a great way for you to sock away the cash you’ll need later in life when you’re not so healthy. For those who have max’d out their IRA and/or 401k contribution limits, an HSA can also function as another retirement savings vehicle, since there are no income limits to participate.

Because the account is in your name, it belongs to you even if your employer contributes to it as part of your benefit package. And, unlike Flexible Spending Accounts, HSAs have no “use it or lose it” requirements, so funds accumulate from year-to-year.

For 2016, the IRS limit on HSA contributions is $3,350 for individuals and $6,750 for families, with another $1,000 in catch-up contributions allowed for those age 55 and older.

There are specific criteria, though, to qualify. You cannot be claimed as a dependent on someone else’s tax return. You must be enrolled in a high deductible health plan (HDHP), and that must be your only health coverage. (An HDHP is defined for 2016 as a plan carrying an annual deductible of $1,300 or more for individuals and $2,600 for families.) You must also be under 65, since those enrolled with Medicare can’t contribute to an HSA.

Who Might Not Want an HSA?
Generally, HDHPs carry lower premiums to compensate for the higher deductibles, so the money you might otherwise have spent on higher premiums can go into your HSA. But it can take a while to save up enough money in your HSA to meet your annual deductible requirement.

Even if you’re young and healthy, you could, for example, get into a car accident that would quickly run up medical bills. So, while you build up your HSA, be sure that you’ll have access to the cash needed to pay your full annual deductible if you experience a serious medical event.

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