If you have a high-deductible health plan, and are eligible to open a health savings account (HSA), but you haven't yet, you're missing out on some major benefits. Here are 6 of the most important.
1. They're easy to use. There's not a lot of hassle to withdrawing funds. The money is yours and you can use it any time you like. You'll usually get a checkbook and/or debit card to make things easier. Try to be frugal, though. When you withdraw from an HSA account, you cut into its investment potential. You could be giving up thousands of dollars in long-term investment income.
2. They're permanent. Unlike a flexible spending account (FSA), you don't have to spend the entire balance every year. The money keeps rolling over. There is a limit to how much you can deposit each year, though. For 2013, it's $3,250 if you're single and $6,450 if you have dependents. Exceeding these limits could earn you an IRS penalty. But try to match these amounts every year and you'll soon be sitting on a nest egg.
3. They're tax-free. The government actually wants you to set aside money for your own health care. That's why it set up the HSA in the first place. Not only are your deposits deductible from your total taxable income, but the money you withdraw for medical reasons is also tax-free. If you use it for anything else, though, be prepared to pay a steep penalty. But there's really no reason to do that. If you wait until you reach 65, you can use the funds any way you like. You'll still have to pay income tax on money used for nonmedical expenses, but there won't be any penalties.
4. They're flexible. Under federal law, there are a wide range of legitimate uses. These include:
- Doctor visits
- Special treatments and surgeries
- Medical equipment, such as crutches or a knee brace
- Dependent health care
- Optometry and dental work
- Prescription and over-the-counter medications
- COBRA premiums
You can use your HSA to purchase over-the-counter medicines, as long as you have a prescription for them. Buying them without a prescription could lead to penalties.
5. They're portable. Your HSA stays with you when you change jobs, retire or get laid off. The money you invest is yours to keep, as is the interest it accrues. Just remember that you won't be able to make any further deposits after age 65. So be sure to build up the maximum amount beforehand.
6. They're profitable. If you can get in early enough and make the maximum deposits each year, you could build up quite a nest egg by the time you reach 65. And because some of the money you deposit can be invested in other ways, health savings accounts offer the potential for building up wealth. Provided you can keep from dipping into it, the funds can really add up.
Just remember to be smart about it. Never skimp on health care simply to avoid using your HSA. After all, that's what the money's there for in the first place.
Created on 08/17/2009
Updated on 11/19/2012
- Pilzer PZ. The New Health Insurance Solution: How to Get Cheaper, Better Coverage without a Traditional Plan. Hoboken, NJ: John Wiley & Sons; 2007.
- Internal Revenue Service. Rev. Proc.2012-26. 26 CFR 601.602: Tax forms and instructions.
- Henry J. Kaiser Family Foundation. Focus on health reform: Summary of the new health reform law. April 21, 2010.