Health savings accounts, also referred to as HSAs, have drastically risen in popularity over the past few years. In order to open an HSA, you must be enrolled in a qualified High Deductible Heath Plan (HDHP). A higher deductible means lower monthly premiums for you, and subsequently huge savings.
An HSA under a qualified HDHP can yield significant savings through these advantages:
- Savings that grow are tax deferred
- Deposits are deductible from federal gross income
- Qualified distributions for medical, dental or vision expenses are never taxed
- Funds rollover to the next year
The increasing popularity of HSAs
This increase of HDHPs and HSAs is a reflection of a healthcare trend throughout the nation. As health insurance costs have risen, HDHPs have been a way for employers to address rising healthcare costs. Many employers are starting to offer HSAs because they can save everyone a lot of money.
How do you know if an HSA is the best option for you?
HSAs are a great option if you rarely get sick as you can take your employer’s contributions and add it to your HSA account. After a few years of accumulating finds, you could have a large amount of savings that is tax free when used for health expenses.
In addition, you can contribute money to your HSA. You can use your HSA money at any point in your life, so even if you rarely get sick now, you can invest that money (tax-free) for years to come and use it when needed.
If you have a chronic medical condition, an HSA might not be the best option for you. An HSA might also not be a good idea if you expect to be needing expensive medical care in the near future. In addition, if you withdraw money from your HSA for non-health expenses, you will be required to pay taxes on it.
Before determining if an HSA makes sense for you, calculate how much you spent on healthcare over the last few years.