An HSA is a special savings account that allows you to set money aside for qualified medical expenses such as co-pays, coinsurance, and prescriptions. Here's the catch: you are only eligible for an HSA if you have a high-deductible health plan (HDHP). In other words, if you have a preferred provider organization (PPO) or other lower-deductible plan, this paragraph won’t apply to you. (If you're not sure which plan you have, check your health insurance card.) There are a few really great benefits to an HSA:
- An HSA has a TRIPLE tax advantage. Here's how it works. (1) The money you put into your HSA is tax deductible. So if you fund $3,000 per year, you won't pay taxes on that money. (2) Your withdrawals are tax-free. So when you take out that $3,000, you still don't have to pay taxes on it. (3) Your money grows tax-free. If you invest the money in your HSA and it grows with time, your earnings aren't taxed, either! It's safe to say that an HSA is one of the most tax-friendly vehicles out there. The only caveat is that you MUST use your withdrawals for qualified medical expenses.
- Your unused balance rolls over every year. With an HSA, there’s no “use it or lose it” risk. Your savings stay with you forever, even after you switch jobs or health plans. That means you can let your funds grow through compound interest and use them down the road for yourself, your kids, or your spouse.
- Your employer may contribute to your HSA. We all like free money!
As with all great things, there are some restrictions to an HSA.
- There are contribution limits. In 2018, individuals can only contribute $3,450 per year, and families can fund $6,900.
- Most HSAs have a monthly maintenance fee. Your employer may cover this fee, but it’s something to look into.
- Your investment options may be limited. You can invest the funds in your HSA, which can turbocharge growth over time. But if your employer contributes to your HSA, you may have to keep it with their pre-approved institution. Unfortunately, these tend to have fewer investment options. If your employer does not contribute to your HSA (or you switch jobs or coverage), then you can move it to another institution that has more options.