What is an HSA?
A Health Savings Account (HSA) lets you contribute a portion of your salary into a specialized savings account designated specifically for health care expenses. With the cost of medical care steadily on the rise, an HSA is a smart way to manage present and future medical expenses.
While it’s somewhat similar to having a 401(k) account, there is one major difference. With a health savings account, you never pay taxes on the money you withdraw from your account as long as that money is used to cover medical expenses.
That means you save money on taxes when you contribute to the account and when you withdraw from it.
Your HSA contributions do more than save taxes on both ends. Depending on the choices your financial institution offers, you might also earn interest on those dollars. Some banks invest your account funds for you, which will help them to grow over time.
Here are a few other things you need to know about HSAs:
- You can have your contributions taken directly from your paycheck
- There are limits to the amount of money you can contribute on an annual basis
- Individuals can contribute up to $3,350 per year
- Families can contribute up to $6,650 per year
- If you’re over the age of 55, you can contribute an additional $1,000 per year
- If you don’t use the money in your HSA, it continues to grow and gain interest annually with no penalty
HSAs and HDHPs
If you enjoy relatively good health and don’t suffer from a chronic medical condition, a health savings account is a smart way to manage health care costs now and during your retirement. Keep in mind that HSAs are typically paired with an HDHP (high deductible health plan).
HSAs are paired with HDHPs because it is a good way to pay for medical expenses only when you need them, as opposed to having a premium taken out of each check.
An HDHP is current health insurance with low premiums, but high deductibles. This means that you will pay little or nothing up front for health care costs, but will have to pay more out of pocket in the event of a medical expense.
HSAs are particularly flexible because friends, family, employers – just about anyone – can make contributions to your HSA on your behalf. When you’ve reached the contribution limits of your 401(k) plan, adding to your HSA makes sound financial sense for the present and for your future retirement.
I have an HSA through my employer. I’m lucky enough to be in relatively good health, so I know that an HSA will benefit me in the long run.