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Health Savings Accounts – What You Need To Know

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By David

You may be able to save money on your taxes if you take advantage of an HSA, otherwise known as a health savings account.

A health savings account is simply a type of savings in which contributions made to the account are tax-deductible. Both earnings and withdrawals are tax free, so long as the money is used to pay for medical expenses.

This may be used to buy prescriptions at the pharmacy or to pay for out-of-pocket medical expenses such as doctor bills not covered under your insurance plan.

To qualify for an HSA you must have an approved high-deductible health insurance plan. The minimum plan deductible is $1,050 if you are single, and $2,100 if you have a family plan.

The plan must also be considered an approved high-deductible health insurance plan by the IRS. If you are uncertain if your plan qualifies as such, contact your health insurance provider.

Here are some of the benefits and disadvantages of HSAs…


Benefits of HSAs

A high deductible health plan will typically cost less than the traditional low deductible health insurance we are accustomed to.

This means that you can now save the difference in premiums between what you were paying and what your new high deductible health plan premiums are in an HSA. These contributions are tax deductible!

When you incur medical expenses, you can make a payment to cover the cost directly from your HSA account via check or debit card, in most cases.

Any interest you earn on your HSA account is tax free. You will not pay taxes – even when you pull the money out – so long as it is for medical expenses.

Let’s look at an example to see the money saving power of an HSA:

Traditional health insurance plan (deductible $500)
Health insurance cost: $250/mo
Annual cost: $3,000

High deductible health plan compatible w/ HSA (deductible $2,500)
Health insurance cost: $110/mo
Save $140/mo to HSA account (difference between the two premiums)
Annual gross cost: $3,000
Annual net costs: (after tax break, 25% bracket) $2,580

By taking advantage of an HSA we potentially saved almost $500.


Disadvantages of HSAs

HSAs require an accompanied high deductible health plan. This means that you will have a relatively high deductible. If you have a major illness or accident, you will be required to meet this higher deductible.

On average, you will likely come out ahead using the HSA, but you need to have the money set aside to afford your deductible until your HSA account is built up.

Some health providers will offer riders that will pay towards your deductible for the first 12 months of your coverage. This allows you time to build up your HSA in case you incur out-of-pocket medical expenses.


What You Need To Know

Check out the competition! Many health plans act as if they come with an HSA attached.

You do not have to use your health carrier’s savings account!

Most HSA accounts have high monthly fees and expenses. Interest rates from bank to bank vary greatly. Some HSAs allow you to use other investment vehicles such as mutual funds while others only allow a fixed interest rate option.

I recommend searching the internet and comparing several different HSA providers before making a selection.

An HSA may not be the right choice for you, but it is worth exploring the option to see if it can save you money.


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