Whether you work for a large company, a small business or for yourself, paying for health care can be a real struggle. Even if you have health insurance, you could find yourself on the hook for thousands of dollars in copayments and deductibles, and even more for the prescription drugs you need. The high cost of staying healthy is what encouraged the government to create health savings accounts, specialized savings vehicles designed to help pay those out-of-pocket costs.
In order to encourage participation, health savings accounts were granted certain tax advantages, and that tax deductibility has made the HSA one of the most powerful financial tools available to the average investor. So what is a health savings account, what do you need to know and should you open one of your own? Here are some key things you need to know.
Health Savings Accounts for Medical Expenses
The original purpose of the health savings account was to pay for current medical expenses, and the HSA is still a valuable tool in that regard. If you anticipate high out-of-pocket costs due to an upcoming operation or serious medical diagnosis, tapping your HSA to pay for your care could lighten the burden on your finances and keep you solvent while you heal.
Many employers now offer health savings accounts to their workers as a fringe benefit, and some even help fund those accounts. In addition to the employer funding, workers can contribute pre-tax dollars to their HSAs, reducing their taxable income in the process.
Health Savings Accounts as a Medicare Planning Tool
Health savings accounts have a number of important benefits, and those advantages go far beyond the payment of current medical expenses. Even if you do not have to spend a dime on your own medical care, you may still want to open a health savings account today.
When you reach the age of Medicare eligibility, you will need to supplement that government insurance with a private plan, and those costs can be quite significant. Since Medicare pays only 80% of eligible expenses, having a supplement plan in place is vital, and you can tap your HSA to pay those costs. In fact, the health savings account is one of the best Medicare planning tools on the market today, and that enough is reason to open and fund one.
Health Savings Accounts and Retirement
The health savings account can be a powerful tool for the payment of current medical expenses, and it is a wonderful Medicare funding tool as well. But there are other benefits as well, including the chance to supplement other retirement savings.
In fact, more and more people are discovering that their health savings accounts can be used as retirement savings vehicles, especially once their accounts reach a certain level. With enough in the accounts to cover current health care expenses, some people are choosing to invest their excess balances in mutual funds, giving their cash a chance to grow and compound over time.
Even if you already contribute to a 401(k) plan at work and an IRA on your own, you might want to give the HSA a look. While the contribution limits are much lower for an HSA, they are still relatively generous, especially when you consider their enormous tax saving benefits.
The Tax Benefits of Health Savings Accounts
The tax saving potential of a health savings account is perhaps its biggest benefit, all the more reason to open and fund one today. When you open and fund an HSA, you get not one, not two, but three big tax benefits, and that makes these unique accounts hard to resist.
The first tax benefit of a health savings account is immediate; when you fund one the money you contribute is deducted from your taxable income, giving you an up-front reduction in the amount you owe the IRS. The second tax benefit comes later on, as the money you put in your HSA grows and compounds on a tax-free basis. And the final benefit comes when you take the money out; as long as the funds are spent on eligible health care expenses, including Medicare supplement premiums, you will not owe taxes on any of that money.
It is hard to deny the many benefits of a health savings account. Given their many advantages, it is hard to believe more people have not discovered these amazing accounts. Whether your health care expenses are high, low or virtually nonexistent, you are sure to find something to love when you open an HSA.