Are you looking for a way to reduce the cost of healthcare? If so, you might consider a Health Savings Account, or HSA. Not only is this offered through employers, but in most cases, they pay the majority of the premiums. Then, the company you work for would deduct your portion automatically from your paychecks.
An HSA looks appealing on many fronts. After all, it lowers the cost of healthcare and saves you money in taxes. Even so, that doesn’t make this particular type of medical coverage the right choice for everyone. Before you decide to sign up for an HSA, take time to review and understand all the details.
The Basics of an HSA
When used in conjunction with a high-deductible health plan, an HSA will dramatically lower the monthly premiums you pay for healthcare. That’s one reason for the growing popularity of this particular plan. Having an HSA and a high-deductible health plan creates a win-win situation for you and your employer. After paying the deductible, you spend very little money to see a doctor, whether for an illness or injury.
Why Are HSA Plans Becoming so Popular?
Although this plan has been around for a while, some people have never heard of it. Usually, large corporations with a significant number of employees offer an HSA. To get employees to switch from a traditional healthcare plan, a lot of companies contribute to the accounts on the employees’ behalf.
Now, before you opt for a high-deductible healthcare plan and HSA combination, it’s important to understand some of the specifics. So, how do you know if this is the best option for you?
Good if You’re Sick and if You’re Not Sick
You Seldom Require Medical Care
If you’re one of those people who seldom become ill, you can put both your employer’s contribution and the money you save on the monthly premiums into your HSA annually. Here’s what makes that beneficial.
Within just a few years, you’ll have a significant amount of money saved. Also, if you use the money for medical purposes, it’s 100 percent tax-free. Another huge advantage of an HSA is that the money saved belongs to you, not your employer. If wanted, you can use it as part of your retirement funds.
Another thing, if you ever decide to go back to a traditional healthcare insurance plan, you can use the money in your HSA to pay for deductibles, co-pays, and coinsurance.
You Require Medical Attention Often
An HSA is beneficial whether you never need medical attention or you need it often. The high deductible is the one concern that most people have about switching to an HSA. However, when you compare your employer’s contributions and the amount of money saved on premiums, the deductible is no longer such a large issue.
Again, when choosing an HSA in conjunction with a high-deductible healthcare plan or an HMO, you can let the savings build each year. Another advantage: Along with your employer, you can contribute money. That way, if there’s ever a gap to fill, you have tax-free funds to use.
Perhaps one of the greatest benefits is that you don’t pay taxes on the money you put into the account, take out of the account, or for investment gains.
Drawbacks of an HSA
Yes, an HSA makes sense in a lot of ways. However, there are some negative aspects you need to understand. For instance, if you live with a chronic illness or anticipate needing a high-dollar medical procedure within the next few years, traditional healthcare insurance will serve you better than an HSA.
Another drawback has to do with withdrawing money for non-health-related issues. In that case, you’d need to pay taxes on the funds you pull out.
Making The Decision
It really all comes down to dollars and cents. Will contributing to an HSA save you money over the long run? You can start with a simple free HSA calculator to help you. This is a good start, but it is not enough. Free calculators such as this are sorely lacking in details. For a more detailed and rigorous approach, use financial planning software such as WealthTrace to help you. You can run multiple scenarios on how your life will play out to see if an HSA always makes sense for you.
Summary
For many people, an HSA makes perfect sense, whereas, for others, it doesn’t. In some instances, people should opt for a Health Reimbursement Account, or HRA. With so many things to consider, it’s worth your time to sit down with a financial advisor to go over the various options.
The ultimate goal is to have excellent medical coverage when you need it but without paying a fortune. An expert can go over the details of an HSA, as well as other healthcare plans, to ensure you make the right decision.
