This post is by our regular contributor, Catherine.
If you’re like most Americans, you’re probably worried about having enough money to pay your medical bills — whether now or in the future.
With premiums and deductibles going up every year, it makes sense to be concerned.
But if you have access to a Health Savings Account, or HSA, you can rest a little easier, and get some huge tax benefits too.
Why Is It a Good Idea to Contribute to an HSA?
There are a lot of really good reasons to contribute to an HSA. Short version: it’s a tax-advantaged account that helps you pay your medical bills!
You contribute pre-tax dollars, just like you would to an IRA or to a Flexible Savings Account (FSA). But unlike with an FSA, your contributions roll over from year to year. If you don’t have a medical emergency this year, your dollars will still be available in the future, even if you change jobs or retire.
Who’s Eligible for an HSA?
Health Savings Accounts were created in 2003 to help Americans enrolled in a high-deductible health plan (HDHP) pay for medical expenses. High-deductible plans are more common these days; in fact, the number of Americans eligible to contribute to an HSA more than doubled between 2008 and 2012!
Employers and health insurers like them because they save money, and consumers appreciate them because they keep up-front costs down. If your employer offers an HDHP, or if you buy one on the Obamacare exchanges, you can also open an HSA.
Why You Need a Medical Emergency Fund with a High-Deductible Plan
High-deductible health plans save money for you up front, but if you do have a medical emergency during the year, you could be facing a big bill: at least $1300 just for the deductible, and over $6000 in maximum out of pocket expenses for a single person.
If you want to avoid going into debt, you’ll need an emergency fund to cover these bills. An HSA is a perfect fit as a medical emergency fund, since you can set money aside in it over a period of years and access it when you really need it.
How Do HSAs Work?
If you’ve ever contributed to a traditional IRA, the process will seem pretty familiar.
- You can contribute up to a certain amount every year (in 2016 it’s $3,350 for singles, $6,750 for a family) and sometimes employers even match your contributions.
- Then, when you have a qualifying medical expense, you can use your HSA funds to pay for it, tax-free.
- Qualifying expenses include common things like glasses, dental care, x-rays, surgery, and lots more; you can find out everything that’s covered and excluded in IRS Publication 502.
What Else is Awesome About HSAs?
One of the coolest things about HSAs is that you can actually invest your funds once you reach a $2000 threshold, so that if you don’t use them they can grow for a long time and even help you pay qualified medical expenses in retirement — all tax-free, of course.
With all the tax advantages they offer, HSAs are definitely one of the best ways to take the edge off of medical expenses. We can probably expect them to be a bigger and bigger part of the American health care system in the future, so it’s a good idea to learn about them now even if you don’t have access to one yet.
Do you contribute to an HSA? Whether you do or not, do you have money set aside for potential unexpected medical expenses?
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I think a HSA is a no-brainer if you have a HDHP. There are just too many benefits to count to overlook it. We max ours out every year though if we end up switching to a health care sharing ministry we’ll lose that benefit unfortunately.
I don’t really have a HDHP option and my current plan is the best and most affordable one my employer offers. My brother-in-law has a HDHP and I was trying to give him some advice so this is a great post to send to him. Currently I think he just contributes a minimal amount and whenever he has a medical expense, he uses a debit card to pay it. I doubt he has met the threshold where he would be investing any of it.
We’ve been fortunate not to need HSAs because we’ve had pretty generous employer-provided coverage for our working lives — but that ends in less than two years when we retire early. At that point, we have to choose an Obamacare plan, and will have the option of doing a low-deductible plan with a higher monthly premium, or a high-deductible plan with HSA. It’s a big decision, and one we can’t answer at this point, but you’ve given us lots of good info here to consider when making that choice. Thanks!
our_nextlife HSAs are great tax-advantaged accounts. Having a HDHP puts some risk on you since a hospital visit could run you thousands due to the high deductible, but the tax shelter it provides is truly incredible.
Andrew LivingRichCheaply I’ve talked to many who have HSAs who do not contribute much of anything. They would be so much better off contributing the max and sheltering some of their income from taxes. More likely than not they will use these dollars (especially the first, say, $50k) since you can shelter it as long as you are alive.
We used to contribute to one, but now we belong to a health sharing ministry so we are unable to. HSA’s are pretty awesome!
We have and use an HSA and love it! It has really come in handy when we had 2 emergency room visits for my hubby last year…not sure how we would have paid for those without the HSA. I love that if we don’t use the money, it carries over to the next year!
I wish I had known about its benefits earlier. My previous employer offered this but I didn’t take advantage of it. Now my current employer doesn’t offer HSA even though I wanted to…
Charlie_15 I would love to have one myself! My employer doesn’t offer them either. Maybe in the future.
kymom13 That’s my favorite part too. Sorry about the ER visits but glad you were prepared!
SenseofCents Do you like the health sharing ministry? I’m curious about them.
FrugalRules Yeah, I really want to have access to one myself — they just seem so awesome.
jdonovanart Oh, cool that you could get your mom one. I think it’ll be really good for older people who have them.