What is an HSA and How Can it Help You?
More and more people these days are talking about HSAs, which stands for Health Savings Accounts. Often the first time you'll hear about it is through work, as more employers encourage the usage of these plans, but you can also find HSA-eligible healthcare plans on the open marketplace as well.
Give me the basics
First, the rules: in order to be eligible to contribute to an HSA account, you must also be enrolled in a high-deductible healthcare plan. The IRS defines what a high deductible is and the amount tends to increase a little bit each year. Many HSA-eligible plans have higher deductibles that are required, but if you're not sure if you're enrolled in an eligible plan, just call your insurance provider and ask.
HSAs allow you to deposit money (up to the annual limit, which depends on whether it's just you or your family enrolled) and deduct it from your taxes, and once in your account any interest or other earnings on the savings is tax-free. Then as long as you spend the money in your account on eligible healthcare expenses, the withdrawals are tax-free as well. Pretty good deal!
But wait, there's more
Most people easily grasp the concept of putting money in your HSA in order to pay for eligible medical expenses tax free, but the HSA actually has a lot more benefits you might want to know about.
Your savings roll over year after year
Unlike its older cousin, the FSA (flexible spending account), HSAs don't require you to spend all the money in your account each year. Remember, it's called a Health Savings Account. So while you may find it helpful to have an account to pay your ongoing medical expenses tax-free, you could also use the account to accumulate savings over the years to pay for bigger expenses in the future, even in to retirement.
Your HSA goes with you
Because most people start their HSA through work, they often think that their HSA is tied to their job, but once you've opened it and funded it, it's yours even if you switch jobs, retire or even if you stay at the company but just want to switch plans. Once the money is in there, you can use it on any eligible expenses you incur going forward, regardless of the type of insurance you have.
In fact, you don't even have to keep your money in the account your company sets up – you can roll it over to another HSA at any time, although you want to plan for any transfer fees before you start moving money around all the time.
Why would I want to move my HSA somewhere else?
One of the bigger picture benefits of the HSA is that once you have a minimum balance in your savings account (that minimum is set by the account provider – most set it at $1,000), you can invest the rest of the money if you're thinking of it as a longer-term savings plan. Remember, any growth you experience in this account, even through investing, is tax-free as long as you eventually use it for medical expenses.
It's a good idea to keep some of your savings in cash to be available in case of a major medical expense – one guideline would be to keep enough to cover your deductible, or to be really safe, you might want enough in cash to cover your annual out-of-pocket maximum. After that though, it might make sense to invest extra savings for that tax-free growth.
With that in mind, some people might choose to move their HSA from the provider that their job chose to an account that has investing options that they like or lower fees for investing. This will require a bit of research on your part, but as HSAs grow in popularity, you'll see more and more financial services companies offering HSAs as an option, much like most of them offer Roth IRAs today.