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If you’re like me, you probably have a sickening amount of different cards in your wallet. Credit cards, a debit card, insurance cards, maybe a pharmacy card. Honestly it can be hard to keep track of it all! However, there's one card you may want to keep in your wallet in 2022.
A health savings account is a tax-free medical savings account that is used to spend money on qualified medical expenses like deductibles, copayments, and coinsurance. It's a way to save an organize money for medical costs, which can lower the amount that is spent on those medical costs over time.
My husband and I just received our first Health Savings Account card and we’re loving it!
Until recently, I didn’t know much about these accounts and how they worked. But I’m happy to say that once you learn the benefits of an HSA – you might also be adding this card to your wallet.
But I can truthfully say that with some research and digging into his company’s HR policies, we’re now on top of our health insurance ins and outs.
Here's everything you need to know about a health savings account.
What Is A Health Savings Account?
Basically, this type of account allows you to pay for medical expenses directly from the account (typically with a debit card).
Think of a 529 plan – any eligible expenses for medical care (such as prescriptions and medical appointment copays) can be covered with the money you’ve saved in the account.
Where does the account balance come from? Well, my husband and I elected to have a certain portion of his income set aside to be contributed to the HSA each pay period.
This way we know we have saved for medical expenses before they even arise.
Let’s talk about the pros and cons of opening this specific account.
Some of the benefits include:
- The balance rolls over year to year
You probably can’t exactly predict how many medical expenses will come up in a calendar year. This way, any remaining balance at year end will be available next year! It’s an awesome perk.
- Your contributions and withdrawals from the account aren’t taxed
My husband’s income goes directly into the account pre-tax, meaning we won’t ever pay federal taxes on this money (even when we withdraw) if it’s used for qualified expenses.
- Your HSA can be invested in mutual funds, and the gains aren’t taxed
First, your HSA will be similar to a savings account. Until it reaches a certain worth, it will earn minimal interest. Then you can invest in mutual funds!
You can select a mutual fund portfolio that fits your needs, earn some extra cash through the market gains, and never pay a penny in taxes even on these gains!
- The balance is transferable – if you change employers or plans, your account can transfer with you
This process is very similar to rolling over your IRA – pretty painless and straightforward. It’s nice to know your money can move with you!
Some drawbacks to this account include:
- You’ll need to keep your receipts to prove that the expenses you covered were qualified
Yep, another reason to keep receipts organized.
- Sometimes there are fees involved for the maintenance of the account
Depending on where your funds are held, the account might require some maintenance fees.
- If withdrawn for nonqualified expenses, the withdrawal is subject to taxes and penalties
Just like a 529 or IRA account, if this money isn’t used for the right expenses, you might be in for a hefty penalty, plus taxes.
How Much Should I Contribute To My HSA?
My husband and I had a hard time deciding how much we should save in this account.
It is recommended that, if you can max out your contributions, you should, and at the very least you save enough to cover your deductible that year.
We decided to contribute a bit over what would cover our deductible, to take advantage of the benefits of the account, and to gage our spending in this first year we have the account.
We also realized our budget couldn’t afford maxing out this year, but we wanted to contribute as much as possible.
Another important factor to consider is eligibility for an HSA in the first place.
To be eligible, your health insurance plan must be considered “high-deductible” by the federal government.
But even if your insurance plan doesn’t offer an HSA, you can open one independently with an investment firm (if you have a high-deductible plan in the first place).
Should I Get A Health Savings Account?
If you expect to have many high-cost medical expenses, typically a high-deductible health plan isn’t for you, and you won’t be eligible to open an HSA.
You’ll probably want a low-deductible plan so you can reach the deductible quickly and have the rest of the year’s expenses covered under your insurance.
In the end, it’s up to you whether or not you want to open specific accounts for specific expenses.
But the key here is that if you have an IRA for retirement, a 529 for educational expenses, and an HSA for medical expenses, you receive so many tax benefits that you would never have received!
It can help you keep your expenses straight, track spending in different categories, and overall set up a super successful financial strategy for yourself and your family.
So, if you’re eligible, I’d definitely recommend adding an HSA account to your financial plan! The debit card is certainly worth the wallet-space. If you need some extra cash to invest, learn how to make it happen!
A Health Savings Account – Final Thoughts
Saving for medical expenses is something is none of us wants to think about.
However, having a health savings account can give you the piece of mind you need when medical problems arise.
Not only that, but your money is contributed tax free, so it's a great way to set money aside that is a little more valuable than a traditional savings account.
So, if you have the opportunity to start saving in a health savings account, so so as soon as possible! That way, your money is there, waiting for you when you need it.