Should You Get a Health Savings Account?

As a mom of three, I wish I would have considered it.

As a mom of three young kids, I know accidents are bound to happen. Milk will get spilled, shoes will get lost, and medical costs will abound. Such was the case when I recently found myself making back-to-back trips to the ER, once for a late-night bout of severe croup and another for a split lip that required stitches. The result? Over $5,000 in combined bills, even after insurance.

I discovered too late just how high our deductible was and was kicking myself for not taking advantage of a Health Savings Account (HSA), which could have helped with those out-of-pocket expenses. Setting aside money for medical emergencies is something many of us already do, so maybe it’s time to explore whether an HSA is right for you.

What’s an HSA, Exactly?

Introduced in 2003, HSAs give people the option of using a tax-favored medical savings account to cover qualified medical expenses. HSAs aren’t meant to replace insurance, but rather to be used in conjunction with high-deductible health plans (HDHP).

HSAs are useful because they offer a triple threat of tax benefits: The money you save in an HSA is tax deductible, certain withdrawals are tax-free (if they are for qualified medical expenses), and whatever you don’t use grows tax-free (much like an IRA).

In 2017, the maximum HSA contribution for an individual is $3,400 annually and $6,750 for families, while HSA holders 55 and older get to save an extra $1,000.

FSAs are Another Option

HSAs aren’t the only health savings option available, though. Flexible Spending Accounts (FSAs) offer many of the same tax benefits of an HSA, but with a couple of distinctions.

HSAs require that you are enrolled in a high-deductible health plan to qualify, while FSAs do not. Also, FSAs also can be used to cover a larger range of expenses than HSAs, giving you more control over how you spend your money.

But perhaps the biggest difference between an FSA and an HSA is that FSAs follow a “use it or lose it” rule. Whatever you don’t use in your FSA during the plan year, you forfeit. In contrast, money in an HSA will continue to grow tax-deferred until you need it, even if you switch jobs or change health plans.

The funds in an HSA can also be invested, similar to an IRA, so over the long run, you get more bang for your buck.

Is an HSA Right for You?

If you meet the high-deductible requirement for an HSA and you’re inclined to set aside savings for unplanned medical expenses, there’s a good chance an HSA is right for you. However, before you jump in, you definitely want to answer a few questions:

Is the high-deductible plan really the better deal?

Before you decide between a high-deductible health plan coupled with an HSA or an insurance plan that offers a lower deductible, make sure you understand exactly what you’ll be gaining and giving up. You’ll need to weigh whether the lower premium of a high-deductible plan is worth the out of pocket expense you’ll face, especially in the case of a medical emergency.

Does my employer match contributions if I open an HSA?

Some employers will offer a partial match to your HSA contributions if you are saving money in an HSA offered through your work. It’s definitely an issue worth factoring in when making your decision.

Are there fees associated with HSAs?

Much like any investment account, you need to be aware of the costs incurred. There are plenty of low or no-cost HSA accounts available – yet some that charge fees – so make sure you are aware of the total cost before you take the leap.