It’s open enrollment season again, which means you’re probably hearing about health savings accounts (HSA). Most companies will provide you with a list of health care options to choose from, including an HSA. A health savings account is a savings vehicle that is intended to be spent on qualifying medical expenses.
An HSA covers a wide range of medical expenses. You can see a list here from the HSA Resource Center.
Typically, a health savings account is attached to a high deductible health care plan. Should you opt for an HSA? Here are some considerations:
Why Use an HSA?
Health savings accounts have a triple tax benefit, meaning:
There is a tax deduction for money you put into the account.
It has tax-deferred growth, so the dividends and interest from the HSA are not taxable.
When you pull money out of the account for applicable expenses, you aren’t taxed.
In addition to the tax benefits, HSA’s are portable, so the funds are available to you whether you change jobs, change health insurance plans, or retire. Plus, your funds roll over from year to year, so whatever you’ve got left in the account at year’s end is still available come January 1.
Maximize Your Health Savings Account
If you want to get the most out of your HSA, you should actually have an additional savings account for out-of-pocket medical expenses. That’s because when you set up an HSA with your employer, that money will go into a savings account. Some companies will allow you to invest in low-cost mutual funds like Vanguard or Dimensional. That’s where you can get most of the growth out of the health savings account.
By paying for your expenses with one savings account, you’re allowing your HSA investment to grow. That will give you a nice bucket of savings for health care expenses when you retire.