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Health Saving Accounts: Yes or NO?

Health Saving Accounts: Yes or NO?

Health Saving Accounts: Yes or NO?

Remember when your employer paid for your health insurance, and even if you had to pay a deductible out of pocket, it was minimal? Come on – that was so 1990. Today you can no longer assume every employer even includes health insurance in your benefit package, and even if they do, you are probably still paying a significant amount of your healthcare costs. You may need a health savings account.

Enter Health Savings Accounts are deferred savings accounts that allow you to deposit tax-free dollars, build up your savings tax free, and then withdraw money tax free to cover certain healthcare costs. If there is a catch in this scenario, it has to do with your deductible. As of January 2, 2020, in order to legally have a HSA, as an individual policy holder your deductible must be $1400, or as a family, the deductible must be $2800. These days, that is a requirement that is not hard to meet.

The good news is that the IRS has issued new guidelines for 2020, which allow those with individual policies to contribute up to $3550, while family plans are allowed to save up to $7100. You can find out more details at the IRS website, but here are some quick facts you need to know:

  • You do not have to use the funds in the year you contribute. You can leave the funds in the account as long as you choose, and your savings will continue to grow.
  • If you are 55 or older, you get to contribute an additional $1000 each year, over and above the above-mentioned deposit limits. However, when you become eligible for Medicare, you can no longer contribute to your HSA.
  • Remember, your deposits and withdrawals are tax free. That makes an HSA more attractive than a 401(k), since the latter taxes your withdrawals.
  • Usually, your HSA will issue you a debit card, which makes paying for prescriptions and other common expenses easy and convenient.

Sounds great, right? It can be, but as with anything else, there are a few drawbacks. For example, some HSA plans charge a fee per use. If you use your HSA funds for non-qualified expenses, you will be charged a 20 percent penalty. Even though your 401(k) requires you to pay taxes on disbursements, many times the investments made via your 401(k) are more robust than  those of an HSA.

Before you decide on an HSA (or any other savings or investment plan), do your research, and be sure to have your smart questions ready for your financial advisor.

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