How to Start a Health Savings Account
Health Savings Accounts (HSA) are a way to save money for health costs like copays, deductibles, prescription medications, over-the-counter items, and more. Here's what you need to know to choose a good HSA and where to get one.
What Is a Health Savings Account or HSA?
A Health Savings Account (HSA) is a special type of tax-free savings account that you can use to save money for medical expenses when you are enrolled in a qualified high deductible health care plan. Health Savings Accounts have many benefits and can double as a savings vessel for you if you do not use the money in the plan for medical expenses.
A Health Saving Account will help you pay for medical expenses that the insurance policy will not pay because they fall under the deductible, as well as items not covered by insurance at all. Besides helping you set aside money to pay for out-of-pocket expenses, there are many other benefits that HSAs offer.
What Are the Advantages of an HSA?
HSAs are interesting options to save money on health insurance and possibly long term. Here are five advantages of an HSA that make it worth considering as a tool to save money on health insurance plan costs, as well as a strategy to save money.
5 Advantages of an HSA
- Money goes into your HSA before it is taxed. This means you can put up to the specified limit aside in your health savings account, tax-free.
- Interest gained on your money in an HSA is also tax free.
- If you do not use the money in your HSA, it carries over for the next year, you do not lose your savings. Imagine how these amounts can easily build up to thousands of dollars for you in a short time, tax free, if you do not need to use it for medical emergencies.
- Another benefit of HSAs is that if you reach the age of 65, and have been lucky enough to not use all the money left in the Health Savings Account, you may be able to use it tax-free in retirement. This is huge because it is like a second retirement fund, that saved you money on health care plans along the way.
- If you end up deducting money from your HSA for medical expenses, you may even qualify for higher tax deductions on medical claims depending on varying circumstances.
Tips for Choosing a Good HSA Account
Because HSA accounts are not only used to reimburse medical expenses to yourself but can also act as savings vessels for your future if you do not use them, then it is important to think of this as an investment type of account.
- Beware of high administrative charges or fees.
- Is the administrative fee waived when you have a specific minimum balance?
- Ask if you will be able to manage your account online
- Will you have a debit card?
- Find out what the process is when you need to withdraw money for a medical claim or get reimbursed for qualified expenses. Do they make the process easy? Are there delays?
- What are your investment options?
Lowest Fees for HSAs
Although you do not need to have a minimum balance or amount of money in the account to have an HSA, some administrators (the bank, credit union or insurance company who manages your HSA) may waive fees once you have hit the minimum balance. Obviously, a plan with a lower minimum balance may save you a lot of money in fees when you are just starting out with your HSA.
Learning about the fees your HSA administrator charges you may result in huge cost savings, and should definitely be an important question when choosing the best place to open your HSA.
Where to Go to Set Up a Health Savings Account
Starting a Health Savings Account is not difficult. You can set up your account with:
- Brokers and financial advisors
- Credit Unions
- Insurance Companies
Banks, credit unions, and insurance companies will only have their own specified plans to offer you. Brokers will have several options. It might be a good idea to ask your bank about their plans, and then speak to a broker who can review some options. Use the tips for choosing a good HSA above to evaluate which HSA will be best for you. Having the help of a licensed broker or financial advisor may give you more advantages. In the end doing a little bit of research may help you earn more money in interest, spend less in fees and give you more control of your account.
What Are the HSA Contribution Limits?
The HSA contribution limit in 2021 for those with an individual health plan is $3,600. The cap on contributions has been rising about $50 a year for inflation adjustments, which allows for significant savings that can build quickly in your HSA.
For those with a family plan the 2021 HSA limit is $7,200.
Is a High Deductible Health Plan or HSA Really a Good Idea?
According to Caitlin Donovan, Director of Outreach and Public Affairs at National Patient Advocate Foundation, Health Savings Accounts are a good idea if you have one. Donovan told The Balance that it's wise to continue using it. With the future of health care plans a little uncertain, one thing that has favorable futures is the potential expanded use of HSAs.