Why You Should Get A Health Savings Account

Learn why you should get a Health Savings Account (HSA) to better your personal finance and health for yourself and your family.

:Insurance, insurance, insurance — such an important part of life, but often a thing we do not understand. And I will confess that I don’t know much about certain types of insurance. When I saw my health insurance options for work, I was first exposed to the Health Savings Account (HSA). The idea of getting this insurance intrigued me and I went into turbo research mode. Everyone knows that health is pretty much the most important baseline of a successful life. So, let’s go into the benefits of an HSA for your physical and financial health!

First off…

What’s an HSA?

An HSA is a Health Savings Account comprised of a:

High Deductible Health Plan + Medical Expenses Savings Account

What is a High Deductible Health Plan (HDHP)?

A HDHP is a health insurance plan with a higher deductible, but lower premium compared to a traditional health plan. A deductible is the amount of money you pay out of pocket before the insurance provider starts covering the expenses. Your premium is how much you pay to the insurance company for the insurance policy.

Note these changes for the 2019 HSA:

Minimum deductible

Single: $1,350

Family: $2,700

Maximum amount you pay out-of-pocket

Single: $6,750

Family: $13,500

Annual contribution limit

Single: $3,500

Family: $7,000

Additional contribution amount you can put in your HSA if you’re 55 or older: $1,000

 

Remember, a HDHP is required to have a HSA. The beauty of the HSA is that you can use the money you contribute to your Medical Expenses Savings Account to help pay your deductible.

Now that we’ve gone through the nitty gritty details, let me break it down so it’s super easy to understand. An HSA is like a debit card where you rack up money in your account by contributing to it each month, which you can use for your current and future medical expenses. And, some employers even will contribute money on your behalf (note: the contribution limit stays the same even if your employer contributes).

So for example, to fully take advantage of the HSA, say I plan to contribute $3,450 in 2018 as a single household and my insurance plan’s deductible is $2,000. Say my employer contributes $450 annually, so I will only need to contribute $3,000. Say I need to get prescription drugs for some random illness. The money I’ve contributed to my HSA debit card will go to pay for the prescription drugs and will get me closer to reaching that $2,000 deductible.

The traditional plan works like car or renter’s insurance protection. In the traditional plan, you’re paying money to the insurance company whether or not you actually get sick. Once you do get sick, you will still typically pay 20% of the medical expenses out-of-pocket but you probably won’t have a designated budget for your medical expenses like the HSA. Say bye bye to your Christmas gifts budget.

The reality is, however, that you should go for a traditional plan if you (and/or your kids) frequently have medical expenses. But, if you (and your kids) are pretty healthy, opt for the HSA to cover your medical expenses because you will have a premium that’s typically lower than a traditional plan’s copay.

What Medical Expenses does the HSA pay for?

There is a whole host of expenses that the HSA pays for, so by no means is this list exhaustive:

  • Vision care

  • Therapist

  • Nursing Home

  • Copays/coinsurance

  • Prescription drugs

  • Ambulance

See the IRS’ full list here.

What are HSA’s Key Benefits?

We talked extensively about how the HSA will benefit your physical health, but now let’s talk about how it will benefit your financial health.

  1. TAX-FREE Contributions

    When you contribute money into your HSA, the money you contribute is not taxed. That means that if you make $4,000 a month and decide to contribute $250 to your HSA every month, the $250 will go directly to your HSA and then the remaining $3,750 will be taxed.

  2. Tax-deductible Contributions

    You can deduct the money you contribute to your HSA from your federal gross income up to the contribution limit. This means you are effectively receiving a tax break because the amount you contributed to your HSA is lowering the total amount of income that you will have to pay taxes on. So if I contributed the max $3,450 in 2018 and I make $50,000 a year, my taxable income will be adjusted to $46,550.

  3. Tax-free Withdrawal

    You don’t pay taxes on money that you withdraw to pay for your medical expenses.

    Note that if you withdraw money for any other reason than for qualified medical expenses, that withdrawn money will be taxed as ordinary income and you will also have to pay a 20% penalty fee (you will not have to pay the penalty if you are 65+ or become disabled, however).

  4. Tax-Exempt Earnings

    If you have unused money in your HSA account, you’re in control of where you want to invest that money. If you earn interest or dividends from those investments, this earned money is tax-exempt at the federal level.

  5. Roll-over

    All the money that you’ve contributed plus all the earnings rolls over year after year after year. This is an excelled plan for your retirement plan. When you’re 65+ you can use this money on non-medical expenses while paying taxes once. Or, you can use the money for qualified medical expenses without paying taxes when you probably will need more money for medical expenses at that age. Either way, your account is growing over years, and thus your total wealth. Beautiful!

Where do you get an HSA?

Ready to get an HSA for Christmas? Here’s where you can go:

  • Health Insurance Company

  • Employer

  • Bank/Credit Union

Are you going to check out getting an HSA? Comment below.

This post contains content this is for informational purposes only, and should not be considered legal or financial advice. Please read my Disclaimer for more information.

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