It’s nearly impossible to know when crisis is going to strike, which is why it is so critical to be prepared. Creating a budget and sticking to it is a great way to start building savings for unexpected medical emergencies. Many employers offer a Health Savings Account (HSA) option to their employees. An HSA is a great way for individuals to start saving for qualified medical expenses.
So, what is a Health Savings Account?
A Health Savings Account is like a personal savings account, except the money in the account is used for qualifying medical expenses. Individuals who are under the age of 65 and participate in a high-deductible health Plan (HDHP) qualify to open an HSA.
Often times, individuals shy away from HDHPs because of the intimidating thought of being stuck trying to find the money to cover the deductible and out of pocket expenses in the event of a medical emergency. However, when you dive into the benefits of an HSA, a high-deductible health plan may feel more realistic. With a HDHP, you have a lower monthly premium which may help you save more money each month. Extra money that can be invested into an HSA!
Should I have an HSA?
There are many advantages and disadvantages to having a Health Savings Account. As you consider if you would benefit from an HSA, keep your budget and health in mind. If you are not expecting extra medical treatments and like the idea of saving for future medical care, you may benefit from opening an HSA. If meeting a high deductible could cause financial stress and you are expecting extra medical care in the upcoming year, an HSA may not be the best option financially.
What are the advantages of Health Savings Accounts?
- Money that is invested into a health savings account grows tax free. This means any interest or additional earnings generated on the money invested into the HSA is tax free. Any money that is not spent on qualifying medical expenses can continue to accumulate in the account for retirement, similar to a 401(k)-retirement savings plan.
- Health Savings Accounts are portable. Any money that is invested into the account will also be available for qualified medical expenses in the future. This holds true regardless of if the medical insurance plan changes or if transferring to a different job.
- Contributions to a health savings account can come from the owner of the account, their employer, a relative, or anyone else who wants to make a contribution. The maximum contributions that can be made to an HSA in 2020 are $3,550 for an individual or $7,100 for couples. This maximum increases by $1,000 for individuals who are 55 or older.
What are the disadvantages of Health Savings Accounts?
- Funds that are invested into an HSA are meant to be used toward qualifying medical expenses. Any funds that are drawn from the account to be used for expenses other than health care costs before the account owner is 65 years old, will incur a 20% penalty.
- Illness can strike when it is least expected, which can make planning for health care costs difficult. Not knowing what you will have to pay for in the future can make it challenging when deciding on how much money should be budgeted for an HSA.
- Money invested into an HSA can be used for qualifying health care costs. To avoid penalties, records must be maintained to prove all withdrawals from the account were used for qualifying medical expenses.
How do I get started?
Health savings accounts are typically offered through employer-sponsored benefits packages. However, if an employer does not offer an HSA, an account can be opened on an individual basis through some financial institutions. Individuals who are under the age of 65 and participate in a high-deductible health insurance plan may qualify to open an HSA.
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