7 Health Savings Account (HSA) Pros And Cons
I read a lot of great material each week on other personal financial blogs such as: ESI Money, White Coat Investor, Physician on Fire, Passive Income MD and many others. Most topics are centered around becoming financially independent, retiring early, saving money and living a balanced life. Unfortunately one of the best kept secrets, which happens to be a tax deductible account, doesn’t get too much attention…the Health Savings Account (HSA) AKA “The Stealth IRA“. Today, I’m going to dive deep and discuss the different HSA pros and cons.
Let’s get going…
What Is A Health Savings Account (HSA)?
The easiest way to explain what a health savings account is this:
It’s a tax-advantaged savings accounts for medical expenses. In 2005, President Bush put this into place as part of a plan for reducing the nation’s spiraling health care costs.
In my opinion, it was one of the best things he did for Americans during his eight years of service.
At the time, President Bush stated:
“Health savings accounts all aim at empowering people to make decisions for themselves, owning their own health care plan, and at the same time bringing some demand control into the cost of heath care. Our view is that if you’re a consumer of health care and you’re in the marketplace making health care decisions, it is more likely that there [would] be more cost control in health care than a system in which the consumer of health care has his or her health care bills paid by a third-party provider.”
Who Can Get a HSA?
HSAs are available only if you’re enrolled in a high-deductible health plan (HDHP). It’s basically an insurance plan with a high deductible, and maximum out of pocket costs.
For 2018, the IRS defines a HDHP as the following:
- Individual – out-of-pocket maximum of $6,650, minimum deductible of $1,350
- Family plan – out-of-pocket maximum is $13,300, minimum deductible is $2,700
We funded an HSA for many years, but now aren’t able to as we dropped our health insurance and switched to Medi-Share.
Now you maybe asking yourself, “Who would get insurance with a high-deductible?”
It’s basically meant to cover catastrophic health events.
Here’s how the US Treasury explains it on their site:
You must have an HDHP if you want to open an HSA. Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn’t pay for the first several thousand dollars of health care expenses (i.e., your “deductible”) but will generally cover you after that. Of course, your HSA is available to help you pay for the expenses your plan does not cover.
So in other words your HDHP health insurance plan is generally less expensive than traditional health coverage because of the higher out of pocket costs, allowing you to take the difference in costs, and put that money into your HSA pre-tax.
Triple Tax Advantage
Bush set up HSAs in a way that give three huge tax advantages:
- Contributions are tax-deductible
- It grows tax-free
- Money is taken out and not taxed
It doesn’t get much better than that.
Use It Or Lose It?
Unlike a Flexible Spending Account (FSA), the HSA balance rolls over each year and doesn’t have to be spent within a specific time frame. It doesn’t have a use-it-or-lose-it policy.
How Can You Use An HSA?
Once you open your account, most companies make accessing the money in it easy by issuing a debit-like card or checks. Both cards and checks can be used for all related medical expenses. .
If for some reason it’s not accepted for a medical expense, you can file a claim for reimbursement. How an HSA is used is really dependent on your benefit plan and company guidelines.
3 Pros Of An HSA
As stated early, money put in the HSA is tax-deductible. Also, the money taken out isn’t taxed federally. But remember, it must be spent on medical expenses.
This is great in that we can now reduce the amount of yearly income tax paid for the year. For example, say you make $50,000 per year. If you put $5000 in your HSA, you will be taxed as if you earned $45,000, which lowers your taxable income.
The interest accrued in the account also grows tax-free.
Here’s a list from the HSA Center on approved expenses.
2)You can take it with you
If you leave a company for another job, don’t worry. You’re able to take your entire HSA balance with you. You can even withdraw the HSA money to pay for non-health expenses. But just like tapping in early to your 401K, you’ll be taxed on that — plus, you’ll pay a penalty.
Here’s one of the best kept secrets. After you turn 65, you can use your HSA savings as retirement money. Here’s the kicker – the money taken out is penalty free, even if it’s used on non-health expenses. It’s for this reason that I recommend using your HSA as a retirement account if possible.
4 Cons Of An HSA
1)You’ll have high deductibles
As previously mentioned, you’re only allowed to open an HSA if you have a HDHP. For those individuals that have health problems, it may not make financial sense to have a high deductible due to the increased frequency of doctor visits.
2)There are account limits
Similar to many types of accounts such as 401k plans and IRAs, there are limitations to how much you can add to your HSA each year.
For 2019, the annual limitation on deductions for an individual with self-only coverage under a HDHP is $3,500. The annual limitation on deductions for an individual with family coverage under a HDHP is $7,000, up from the $6,900 limit for 2018.
3)You could pay penalties
The funds from a health savings account must be used for medical expenses. If not, penalties will apply.
If you choose to withdraw money for a non-medical expense, you’ll pay taxes on the amount — plus a 20 percent penalty. After age 65, you’ll pay taxes but not the penalty on non-qualified withdrawals.
4)Watch out for fees
Depending on which company you use to open your health savings account, you could face maintenance fees of up to $4.50 per month.
A Morningstar analyst told CNBC that account maintenance fees are the most important factor in choosing an HSA if you plan on using it as a spending vehicle. They also said, “Because interest rates are low, maintenance fees have a much larger impact on balances than rates for the average account holder.”
There are some companies that will actually waive the fees if you carry a minimum balance (anywhere from $1,000 to $5,000). This is something to consider while researching these accounts.
Summing Up Health Savings Accounts
Before deciding to open an HSA, it’s best to research first by comparing plans and deciding if it is a cost-effective option for your family situation.
There are many pros and cons associated with an HSA, but again, it all boils down to each individual’s financial situation.