Lately, my dad’s been praising the benefits of having a health savings account. This year, he had the opportunity to get the most of his HSA — bad news for his health, but good news for his wallet (side note: Dad is now doing OK health-wise).
At any rate, I’ve spent the week researching, calculating and mulling over whether an HSA is the best option for me. I reviewed a lot of your comments from a previous piece. After a few conversations with Dad, I decided to put together a pro and con list to help me both understand HSAs and decide if I should open one.
Rather than save my notes in the annals of my laptop, I’ve decided to share them here, with the GRS readers who might find them useful. I’m not an expert, and I realize the topic was mentioned in a recent piece, HDHP with HSA: friend or foe? But perhaps you can consider this an overall, “for-Dummies” type of HSA guide. Also, I’m a freelancer, so my notes don’t take employer contributions into consideration.
If you already know the ins and outs of health savings accounts, you may want to skip this part. However, it could be a good refresher.
- An HSA lets you save money for future health-related expenses. It’s essentially like an IRA savings account for your health. And after you turn 65, it’s even more similar to an IRA, because you can take out money for non-health expenses.
- You can use money from your HSA to pay for a slew of health expenses, from contact lenses to acupuncture.
- The money you put in the HSA is tax-deductible. Also, the money you withdraw isn’t federally taxed, as long as you spend it on approved, health-related stuff. The HSA’s interest income isn’t federally taxed, either.
- You can’t use money from your HSA to pay for your health insurance premium — unless you’re unemployed.
- There are limits to how much you can save. For 2012, you can sock away $3,100 if you’re an individual. If you’re in the 25 percent tax bracket, that would give you a maximum annual savings of $775 (for 2013, the limits are $3,250 for singles and $6,450 for families).
The pros of opening an HSA — there are many!
For me, the main draw of the HSA is the tax savings. As I mentioned above, an individual can save up to $775/year (in the 25 percent bracket). That amount increases if you’re a family or if you’re over 55.
An HSA also earns interest, and unlike regular savings accounts, that interest isn’t taxed. I think the amount of interest I earned last month was something like six bucks. So my initial reaction is whoop de do, but my frugal side reminds me that every little bit helps.
The most obvious benefit of the HSA is that you’re funding the future. You’re being responsible. The HSA is an emergency fund for your health.
And if you really hit tough times, you can even withdraw the HSA money to pay for non-health expenses. Of course, you’ll be taxed on that — plus, you’ll pay a penalty.
After age 65, you can use your HSA savings as retirement money. You’re free to spend it, penalty free, on non-health expenses.
Free preventive procedures
Wellness procedures — breast exams, cancer screenings — are usually not subject to the HSA-compatible plan’s deductible. Those office visits are covered before the deductible, and often, they’re free. Of course, many traditional insurance plans have that same benefit.
HSAs can pay for a variety of expenses
You might be surprised at some of the things you can buy with your HSA money.
Band-aids? Covered. Condoms? Yep. You can even pay for rubbing alcohol with your HSA. Examples that are probably more helpful include chiropractic adjustments and mental health services.
The cons of opening an HSA — there are a few
Cost of office visits and prescriptions
I compared my traditional Blue Shield plan with their HSA-compatible plan. With the HSA, I’d be responsible for paying the full amount of doctors’ visits and prescriptions — until I met the deductible. But the deductible is $6,000 — I’m probably not going to reach that. If I have a couple of non-preventive office visits and prescription expenses a year, the HSA plan would end up costing me several hundred bucks.
Compared to my traditional plan, which requires that I pay $35/visit and $10/prescription (before the deductible), I could actually be spending more for the HSA plan — even considering the tax savings. I suppose it depends on what health issues arise and how much I’m willing to contribute.
Unsurprisingly, like any other bank account, an HSA comes with its share of fees. They vary, but from my research, most seem to have a start-up fee, transaction fee, debit fee, and in some cases, a monthly maintenance fee. Some may even have a minimum account balance fee.
Even though the federal government allows deductions of HSA contributions, a few states don’t follow suit. Alabama, California and New Jersey don’t allow income deductions for the money you save in your HSA. And in New Hampshire and Tennessee, you’re still taxed on the earned interest.
Not meeting the deductible
This is pretty much what Joanna discussed. In theory (and, according to some of your comments, in reality), the health expenses you may have to pay with an HSA plan could outweigh the tax savings. For example, one reader mentioned that the amount he pays in his prescriptions for the year makes the HSA not worth it. If the deductible isn’t being met, I can understand that.
This seems to be one of those “it depends on the situation” scenarios.
While you can save up to $775 a year with the HSA, this also means you’re less $3,000 for the year. And that money might be crucial to your short-term goals. If you’ve got a car to save up for or debts to pay down, for example, contributing that much into an HSA may not be sensible.
There are plenty of reasons to love HSAs, and while I do think they’re great, I can also see scenarios in which the tax incentives might not always be worth it.
But of course, it’s not just about tax incentives — the point of the HSA is also to save for the future. In the end, that seems to be what it comes down to, whether you’re using an emergency fund or an account with tax incentives. In my dad’s simple but shrewd words: “The bottom line is: save, save, save — as much as possible. Trust me, you will need it.”
If you’ve passed on an HSA, why wasn’t it worth it to you?
What are some HSA pros and cons I’ve missed?
Is the HSA any more or less beneficial for families than for individuals?
Note: This article was edited to remove some erroneous information about tax savings. Remember, our contributors are not providing expert advice (unless noted) and readers should always seek professional advice on financial topics.
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