Medical-Related Savings Plans: What Is a Health Savings Account?
HSAs are used with high-deductible health insurance plans and are tax deductible
In his first address to a joint session of Congress, President Trump discussed the need for health savings plans (HSAs) in the planned repeal and replacement of the Affordable Care Act. But what exactly is an HSA and why is it a good idea to have one?
A health savings account is one type of medical-related savings plans, also known as medical reimbursement arrangements (MRAs). The other types are the flexible spending account (FSA) and the health reimbursement arrangement/account (HRA).
An HSA is kind of like an IRA for medical expenses. It is used together with high-deductible health insurance plans (plans with a minimum annual deductible of $1,300 for an individual and $2,600 for a family).
You can deduct any contributions you make to an HSA from your taxes, and you can also invest them in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and fixed-income investments. Earnings from investments grow tax free. Withdrawals made from an HSA that are used to pay medical expenses are not subject to taxes either; however, if you withdraw money and spend it on a non-medical expense, it will be subject to both ordinary income tax and a 20 percent penalty from the IRS.
What Does an HSA Do?
You can use money in your HSA to pay medical costs that your health insurance doesn't cover, including co-payments, deductibles, and certain uncovered expenses.
You usually get either a debit card or a checkbook when you open one of these accounts so that you will be able to access the money.
2017 contribution limits for HSA plans are $3,400 for individuals and $6,750 for families. If you are 55 or older, your limit is extended by an extra $1,000 so you can "catch up." Some employers also pay some or all HRA contributions as a benefit for employees. Finally, you can also carry contributions not used in one year forward to the next year.
Is an HSA a Good Choice for You?
HSAs are great plans for those who have significant medical expenses but don't itemize deductions on their tax returns. This is particularly important since medical expenses are deductible only to the degree that they exceed your adjusted gross income by 10 percent.
You can also carry big HSA balances into retirement if you've been relatively healthy through your working years. You can then use the money to pay for out-of-pocket medical costs that tend to increase with age.
Where Can You Get an HSA?
HSAs are often available through employers, but you can also set one up as an individual. Many financial institutions offer this plan, so consider opening one for yourself if your employer doesn't offer them.