March 18, 2020

Do I Need a Health Savings Account (HSA)?

First things first. What is an HSA?

A health savings account (HSA) is a tax-favored savings account with a purpose of paying for medical expenses. The funds can be used to pay for insurance deductibles, out-of-pocket expenses, and qualified medical expenses – including some that may not be covered by health insurance.

Think of an HSA as a special emergency fund that has serious tax benefits. More on that soon!

A health savings account is yours.

First, it’s important to understand how HSAs are set up. Having a health savings account is contingent upon having a high deductible health plan (HDHP), but the account is not tied to your employer or health insurance provider. HSAs are administered through a financial institution and owned by you – meaning if your HSA is through your primary bank, the account will appear right alongside your regular savings and checking accounts.

Just like your personal savings account, any money left in the account earns interest and is yours to keep year after year. This differs from a flexible spending account (FSA), which operates with a “use it or lose it” rule.

It also means if your employer or insurance carrier changes, the money saved in the account is still yours for current or future health-related expenses.

HSAs offer a triple tax advantage.

Now to the exciting part. Why have a separate savings account for medical expenses? HSAs offer tax benefits in three key areas.

  1. Contributions: Contributions are 100% tax deductible up to the annual limit.
  2. Earnings: The account balance accumulates tax-deferred interest, allowing you to decide when to spend and when to save.
  3. Withdrawals: Withdrawals are tax-free if they are used for qualified medical expenses – even in retirement. Note: Please consult the IRS for a current list of eligible and ineligible expenses.

Is an HSA right for you?

If you have a high deductible health plan, an HSA can offer peace of mind and financial value that grows over time. It’s even possible your employer will contribute to the account, compounding earnings even further.

If you’re deciding between a traditional and high deductible health plan, it’s important to compare and determine which plan is right for your situation. Consider each plan’s costs, including monthly premiums, deductibles, and copays. Also think about your family’s health: are you generally healthy or is it likely you’ll need medical attention in the next year? A high deductible plan coupled with an HSA may be a preferable option.

While we can’t help determine if a high deductible health plan is right for you, we can refer you to a helpful resource. IRS Publication 969 is a great place to get started understanding HSAs and other tax-favored health plans. For more assistance, we encourage you to speak with your company’s human resources department or your tax advisor.

Make the most of an HSA.

If you decide an HSA is right for you, there are suggested ways to reap the most benefits from the account.

  • Like an individual retirement account (IRA), HSAs have an annual contribution limit. Contribute the maximum amount each year to take full advantage of tax-free savings. The limits differ for an individual, family, and for those age 55 and up – so stay up to date on the current limits>.
  • This Motley Fool article suggests thinking of your HSA as a retirement tool. If you don’t need the funds now, the balance will continue to grow tax-free through contributions and compound interest. The more it can grow now, the more you will have down the road when it is needed.
  • Use an HSA Calculator to calculate potential tax savings, estimate future value, and compare health plans.

Keep in mind every situation is unique. What works or is suggested by one person may not make sense for you.

The fine print: HSA requirements and qualifications

In general, you may contribute to an HSA if:

  • You are or will be covered by a qualified high deductible health plan (HDHP)
  • You are not covered under any other health plan that is not compatible with a health savings account
  • You are not enrolled in Medicare
  • You may not be claimed as a dependent on another person’s tax return

There are no eligibility restrictions regarding income level, and there is no requirement of earned income to make contributions.

Please consult your accountant or tax advisor for guidance on your HSA eligibility.

Ready to get started?

Have you decided a health savings account is right for you? Fortifi Bank is here to help you stay one step ahead of medical expenses. Our HSA is simple, easy to set up, offers tiered interest, and offers several access options to be able to pay for qualified expenses easily.

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