Is a Health Savings Account Right for You?

Savings

Is a Health Savings Account Right for You?

Health Insurance
Ilima Loomis
By Ilima Loomis
Jan 28, 2020
Woman at desk trying to figure out if she has the right health savings account

If you’ve been hearing about Health Savings Accounts, you may be wondering if this type of financial tool is right for you. These tax-advantaged accounts allow you to save money for future medical expenses, including prescription drugs, making them attractive people looking to reduce their health care costs.

The reality is, HSAs can be a great option for some people, while others may not be able to reap their full benefit. Here’s what you need to know before you decide whether or not to open one of these accounts.

  • What a Health Savings Account is
  • How HSAs work
  • How much you can contribute to an HSA
  • What medical expenses are covered by an HSA — and what’s not
  • Pros and Cons

What is an HSA and How Does It Work?

An HSA is a special kind of personal savings account that allows you to set aside money and use it for qualified medical expenses like deductibles, copayments, and coinsurance. These types of plans are designed to complement high-deductible health plans, because they help you to save money for expenses you’d have to pay out of pocket before reaching your deductible. And in fact, you can only open an HSA if you have a high-deductible health plan.

To grow your HSA, you can deposit money into the account, and you don’t have to pay income tax on the money you put in. In some cases, you may also be able to invest the funds and earn interest, tax-free. And if you don’t use all the money by the end of the year, it can roll over to the following year, so that the account grows over time.

In addition to adding money directly to your own account, your employer can make contributions, as can anyone who wants to contribute toward your health care costs, like a family member. Regardless of who’s making the deposit, however, the total amount needs to be within the contribution limits (for 2020, that’s $3,550 per year for individuals, or $7,100 for families). And while you can’t make any more contributions to your HSA after you enroll in Medicare, you’re allowed to deposit an additional $1,000 over the limit between the ages of 55 and 65, to help you build up the account for retirement.

Save Up to 85% on Your Prescriptions

Once you have money in the account, you can withdraw it at any time to pay for qualified out-of-pocket medical expenses. You may get a debit card or checkbook that you can use to pay medical bills, or you can pay out of pocket and then reimburse yourself from the account later. And in addition to paying for your own health care, you can dip into the account to cover the medical costs of a spouse, child, or other relatives who are part of your household, even if they aren’t on your health insurance plan.

Be sure to only use the account for qualifying expenses — and to keep documentation of your medical bills. That’s because if you’re younger than 65 and withdraw funds for nonmedical expenses, you’ll pay income taxes on the money, plus a 20% penalty.

What’s Covered — And What Isn’t?

HSAs don’t just cover copayments for doctor’s visits. You can use your HSA for a long list of medical expenses, including:

  • Acupuncture
  • Ambulance services
  • Birth control
  • Breastfeeding supplies like breast pumps
  • Chiropractor services
  • Crutches
  • Diagnostic services (like X-rays)
  • Fertility treatment
  • Insulin
  • Laboratory services
  • Medical supplies
  • Nursing services
  • Oxygen
  • Physical therapy
  • Over-the-counter pregnancy tests
  • Post-mastectomy bras
  • Psychiatric care
  • Smoking cessation
  • Substance abuse treatment
  • Travel essential to receive medical care
  • Vasectomy
  • Weight loss programs

HSAs can also be used for prescription medications, as well as some over-the-counter medicines if they have been prescribed by a doctor. If you’re paying for medication with an HSA, shop around for the best price and find discounts by using the RxSaver tool.

Finally, HSAs can also be used for dental care not covered by your dental insurance, as well as vision care, including glasses, contact lenses, and laser eye surgery.

What’s not covered? In most cases, you can’t use an HSA to pay for your health insurance premiums. Other costs that won’t qualify for coverage include things like vitamins, elective cosmetic procedures, maternity clothes, baby supplies for healthy babies, over-the-counter medicine (unless prescribed by a doctor) and funerals.

Pros and Cons of HSAs

For some people, HSAs can offer a lot of advantages:

  • They can help you keep your insurance premiums down by making it easier to use a high-deductible health plan.
  • In addition to lowering your federal income taxes, many states also offer tax breaks or incentives on funds you deposit in an HSA.
  • Any money you deposit in the HSA belongs to you. You take it with you if you change jobs, and you can decide how much money you want to set aside, and how to spend it.
  • If you’re generally healthy and don’t expect to spend a lot on health care right now, they can help you save for medical expenses in the future or after you retire.
  • After you turn 65, you can take money out of the account for non-medical expenses. While you’ll pay income taxes on it (like you would for an IRA), there’s no penalty.

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However, HSAs aren’t right for everyone. If you’re older or already dealing with health issues, you may have a harder time saving enough to pay for your medical expenses. And illness is unpredictable, so it can be hard to know how much money you need to save, even if you’re currently healthy. And finally, having an HSA account might make you less likely to spend the money on medical care even when you need it.

There are a lot of factors that go into choosing insurance coverage, including your age, how healthy you are, your family, and your overall financial picture. But the bottom line is that if you have a high-deductible health plan, a health savings account can help you lower your taxes, save money, and budget for a wide range of possible health care expenses, now or in the future.

Ilima Loomis

Ilima Loomis

Ilima Loomis is a freelance writer and journalist who specializes in writing about health care, HR, science, travel, and Hawaii. You can find more of her work at ilimaloomis.com. Ilima is a regular contributor to the RxSaver blog.

The information on this site is generalized and is not medical advice. It is intended to supplement, not substitute for, the expertise and judgment of your healthcare professional. Always seek the advice of your healthcare professional with any questions you may have regarding a medical condition. Never disregard seeking advice or delay in seeking treatment because of something you have read on our site. RxSaver makes no warranty as to the accuracy, reliability or completeness of this information.

If you are in crisis or you think you may have a medical emergency, call your doctor or 911 immediately.

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