Health Savings Accounts: Stop Fearing High Deductibles and Start Saving

It seems these days that no one can agree on what to do about US health care coverage. The one thing everybody can agree on, however, is that the cost of health care and health insurance keeps going up. Premiums, deductibles, co-pays, non-covered expenses—it all adds up to a very expensive attempt to stay healthy.

As health care costs explode, many people are looking to lower their health insurance premiums with higher deductibles. While premiums on high-deductible plans are more affordable, the large deductibles can make depending on your health insurance for coverage scary. One way to pay for deductibles and other expenses not covered by those high-deductible health plans is with a Health Savings Account (HSA).

What is a Health Savings Account?

HSAs were created by the 2003 Medicare Prescription Drug, Improvement, and Modernization Act to help individuals save for qualified medical expenses on a tax-free basis. You can also use the money in your HSA for certain other health services your policy doesn’t cover—like those pesky co-pays—and as a savings vehicle for retirement.

Why You Should Consider HSAs

The “savings” in HSAs covers more than merely hoarding some cash for a rainy day. Here are some important ways a Health Savings Account can help you save money both short- and long-term.

1. Tax-deductible savings – As with IRAs, the money you sock away in your HSA is tax-deductible. You can contribute up to $3,400 as an individual, or $6,750 for family coverage in 2017. If you’re 55 or more, you can play catch-up with an added $1,000 contribution per year.

2. Tax-free withdrawals – As long as you use the money for “qualified medical expenses,” you’ll pay no tax on what you take out. These expenses include vision and dental, doctor visits, physical therapy, hearing aids and other medical devices, among many others. Check with the IRS for rules on what qualifies.

3. Tax-free growth – Leaving the money in your account, if you can afford to, and letting it grow over the years will give you a nice nest-egg by the time you retire. If you wait till age 65 to withdraw it, you can use the money on anything you like, just paying taxes on it like normal income. If you use it on qualified medical expenses, there’s no tax on withdrawals at all. Just don’t take it to go the movies before you turn 65—you’ll pay a hefty 20% penalty on non-medical expenses in addition to the taxes!

How to Get Started

Your employer may offer plans that are HSA-eligible. Some even offer matching contributions. Absent that, if you have a qualifying high-deductible health plan, you can set up an HSA at your banking institution.

The specter of catastrophic illness or injury looms large if your health insurance coverage is inadequate or your deductibles are out of sight. With judicious use of a Health Savings Account, you can shrink that menace down to size and plan for a healthier financial future.