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What's an HSA and Do I Need One?

Blog Post
2 min read
Calculating Health Expenses

Open enrollment season is fast approaching. But that doesn't mean you're any closer to deciding between a low or high-deductible health insurance plan. One thing is clear – they each have pros and cons. While low-deductible plans require less out-of-pocket before the plan starts covering costs, many people are unaware that high-deductible health plan participants can use a health savings account to experience increased savings.

 

What is a Health Savings Account?

Health savings accounts (HSAs) are tax-advantaged accounts that hold the money you'll later use to pay for qualified medical expenses. You can make deposits into the account up to the annual limit for the plan year. For 2021, the annual HSA contribution limit for individuals is $3,600. Families may contribute up to $7,200.

How Does an HSA Work?

Money is deposited into a designated savings account and then withdrawn for qualified medical expenses on a schedule that fits your budget and medical needs. Use funds to cover various health care costs, such as deductibles, co-payments, and certain out-of-network medical treatment.

HSA Advantages

HSA account holders enjoy several benefits, including:

  • Employer contributions. Some employers contribute to the account as a workplace benefit.
  • Account ownership. If you switch jobs, the account and money are yours to keep.
  • Tax benefits. HSAs are non-taxable income since the money deposited is typically already taxed.
  • Interest earnings. Some HSAs will pay interest on the deposited amount, while others reinvest your balance in various financial products. In either case, most earnings from an HSA are tax-free.

HSA Disadvantages

While there are several benefits to funding an HSA, there are also a few more things to consider. For example:

  • You must be enrolled in a high deductible health plan (HDHP) as defined by the Internal Revenue Service (IRS) before you can open an HSA.
  • While HSAs allow you to withdraw funds for any expense, using the money to pay for non-qualified medical expenses could lead to stiff IRS penalties come tax season.

Should I Open an HSA?

While each situation is different, your decision should factor in your budget and what kind of medical care you're likely to need in the coming year.

If you're healthy and want to prepare for future health care costs, an HSA may be an excellent choice for you. It could also be a wise long-term investment tool since funds can offset healthcare costs after retirement.

However, if you expect to have significant medical expenses in the coming year, an HSA might not be your best option.

*See your tax advisor for more information on how an HSA may affect your tax obligations.