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The Pros and Cons of a Health Savings Account

Navigating the world of healthcare can be a complex and stressful experience. Not only do you have to worry about choosing health insurance, but you also need to figure out how to cover any future costs that might not be covered by that insurance.

One option is to open a health savings account (HSA). While not for everyone, an HSA can be a major help when it comes to covering medical expenses of all types. If you’ve never heard of an HSA or just aren't sure how it works, then you’re in the right place. Let’s look at what an HSA is, why you might want it (or not), and how to make the most of one if you choose to go that route.

First things first: What is a health savings account?

Simply put, an HSA is a personal savings account designed to cover out-of-pocket medical costs. This account is meant to be used by people under 65 who are enrolled in high-deductible health insurance plans, which boast low premiums but offset those with deductibles and out-of-pocket limits that are higher than other plans.

So what are the advantages of a health savings account?

An HSA offers several advantages over a traditional savings account and over its cousin, the flexible spending account (FSA):

  • You don’t have to worry about federal income tax. Any pre-tax contribution made by yourself or others is not subject to federal income tax. This is also true for most states’ income tax. If you contribute anything after taxes, that contribution is tax-deductible. Beyond that, any interest or earnings from investments made through your HSA are also not subject to tax.
  • An HSA can pay for more than your deductible. It can be used for a variety of expenses, including dental and mental health needs. What’s more, you can use the money you’ve saved for non-medical expenses in a pinch, though these will be subject to a tax penalty.
  • Your money doesn’t expire. With an FSA, if you have money left over at the end of the year, you can only roll over a maximum of $550. With an HSA, however, all of your money rolls over, so you don’t have to worry about using it or losing it.
  • Your HSA money is truly your money. The money put into an employer-sponsored FSA can only be used for as long as you work for that employer. With an HSA, there are no such restrictions. You have the option of moving your HSA money to another account at any time, regardless of whether you quit your job, retire, or change insurance plans.

That all sounds great. Why wouldn’t I want one?

The main reason you might opt against enrolling in an HSA? If a high-deductible health insurance plan is not right for you.

A high-deductible plan is best for people in good health who are looking to save money for future expenses. It can also be useful for those nearing retirement and looking to offset the costs of Medicare and other post-employment insurance. If you expect to undergo any expensive medical procedures in the near future, however, an HSA might not be enough to cover the out-of-pocket costs associated with this type of plan.

I’ve decided an HSA is for me. How do I make the most of it?

Great question! There are a few strategies for maximizing the benefits of an HSA:

1. Invest when the time is right.

Because the earnings you make in an HSA are tax-free, they can offer a good way to grow wealth and make sure you’re ready for any sudden medical expenses that come your way. To avoid unnecessary risk, it's a good idea to keep at least $5,000 in savings and only invest over that amount. Low-cost mutual funds are excellent, stable choices for investment that won’t hit you with expensive investing fees.

2. Be picky about when you use your insurance.

Compare the price of treatment using insurance with the price you’ll pay without it. The cash price is often lower and is the perfect opportunity to make the most of your HSA funds. Keep in mind, however, that any payments you make this way won't go toward paying down your out-of-pocket maximums.

3. Enroll in a virtual care subscription plan.

While you can’t have supplemental insurance if you’re enrolled in an HSA, there are other ways to cut costs. A virtual care subscription is a great way to address common health issues without ever having to visit a physical doctor’s office or involve your insurance. Health Karma, for example, offers a virtual care platform that incorporates both primary care and behavioral health into its services. This plan includes virtual checkups for wellness or chronic diseases, in-the-moment behavioral therapy, and round-the-clock urgent care. It also provides access to special discounts for dental, vision, hearing, drugs and vitamins, medical equipment, and more.

An HSA can be a powerful tool for managing healthcare expenses. While it’s not for everyone, if you’re enrolling in a high-deductible health insurance plan, it might be right for you.

To learn more about how to save money in healthcare, click here..