Health Savings Account – Should You Have One?
June 5, 2020 | COVID-19 crisis
Planning for a crisis is basically impossible, which is why it is so important to be prepared. Creating a budget and sticking to it is a great way to start building savings for unexpected medical emergencies. Many employers offer a Health Savings Account (HSA) option to their employees. An HSA can help individuals to start saving for qualified medical expenses on a tax-free basis. HSAs provide a triple tax advantage—contributions, investment earnings and amounts distributed for qualified medical expenses are ALL exempt from federal income tax, Social Security/Medicare tax and most state income taxes.
Should I have an HSA?
If you are considering if you would benefit from an HSA, keep your budget and health in mind. If you like the idea of saving for future medical care and saving on taxes, you may benefit from opening an HSA. On the other hand, if meeting a high deductible could cause financial stress, an HSA may not be the best option.
What are the advantages?
- Money that is invested into an HSA grows tax-free.
- HSAs are portable.
- Individuals other than the account owner can contribute to the HSA. For example, the employer, a relative and more.
What are the disadvantages?
- HSA funds are meant to be used toward qualifying medical expenses. Other withdrawals could incur a 20% penalty.
- Illness can strike when it’s least expected. Not knowing what you’ll have to pay for in the future may be challenging when budgeting for an HSA.
- To avoid penalties, records must be maintained to prove all withdrawals from the HSA were used for qualifying medical expenses.
How do I get started?
HSAs are typically offered through employer-sponsored benefits packages. However, an account can also be opened on an individual basis through some financial institutions. Individuals under the age of 65 who participate in a qualified high-deductible health insurance plan may qualify to open an HSA.