The Benefits of Health Savings Accounts

This article was featured in the Personal Finance section of El Nuevo Herald on Sunday, March 13, 2016. Please find the link to the published article at the bottom of this post.

Recently there’s been quite a lot of buzz surrounding Health Savings Accounts or “HSA” and rightfully so.  With the increased cost of health insurance, many companies are reducing their cost by offering high-deductible health insurance to employees.

HSAs are used mainly to help you pay for medical expenses with tax-free money, but they can only be established if you have high deductible health insurance plan that is compatible with HSAs.

There are many other benefits to establishing an HSA:  Any amounts not used for medical expenses can accumulate for retirement just like an Individual Retirement Account or “IRA”.  In other words, there is no deadline to use the funds in the HSA.

One amazing feature of an HSA is that once the account is established and funded with even just $1, you can wait until you know how much your out-of-pocket medical expenses will be to fund the account; get a tax deduction for the contribution; and pay the medical expense with tax-free money.

For example, David and Maria have a high-deductible health insurance plan through David’s employer, which is compatible with an HSA.  On March 1st Maria finds out she is pregnant.  They are not sure how much they will pay for the delivery of the baby and any other medical expenses.  David can immediately establish an HSA plan and deposit $1.  At this point, any medical expenses incurred after the date the HSA is established can be paid from the HSA.  So when David and Maria get their hospital bill showing they owe $3,000, they can deposit $3,000 into the HSA, get a tax deduction for the deposit and pay the hospital bill with tax-free money.

It is important to note that if you take a distribution from an HSA for anything other than medical expenses, it will be fully taxable and if you are under age 65, it will also be subject to a penalty.

Getting the most out of HSAs:

To get the most benefit, a family would contribute the maximum allowable each year, for 2016 that is $6,750.  If they incur medical expenses, they can pay it from the account, but if not, they would get the benefit of tax-free growth within the HSA.

With maximum annual contributions of $6,750 plus interest at current rates, an HSA can help a couple accumulate almost $150,000 over the course of 20 years.  This can be used to help cover medical expenses during retirement and the best part is you received a tax deduction for all the contributions each year.

Your company’s human resources department may be a good starting point to help you determine if your health insurance is a HDHP that is compatible with an HSA and give you specifics on establishing and funding an HSA.  If your health plan is not through your company, it is wise to check with your insurance provider or financial advisor.

Link to the article in El Nuevo Herald:

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