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The Basic Pros and Cons of HSAs

If you’re like most Americans, your top financial fear is not being able to pay for medical emergencies. But thanks to HSAs (Health Savings Accounts), many people can now pay for their unexpected medical costs. Although this type of account offers several advantages, it isn’t suited for everyone. Here’s what you need to know about the pros and cons of HSAs, along with a few considerations and warnings.

What Exactly Is an HSA?

An HSA is a specialized account that’s designed to help people minimize their medical expenses. It’s intended to serve as a more affordable option to traditional healthcare insurance.  The idea behind this type of account is that healthy Americans can make regular contributions to their accounts, enabling them to keep cheap health insurance.

Besides providing a way for Americans with high-deductible health plans to pay for their current medical costs, HSAs let people save for future expenses. You can set up an HSA with yourself as the sole beneficiary or add your spouse and/or any dependents you may have.

Main Advantages of HSAs

  • Tax savings—One of the primary benefits of an HSA is its tax advantages. In fact, there are three separate tax benefits. The contributions you make are pre-tax and tax deductible. This means that your money can grow without being taxed.
  • By being able to have your HSA contributions deducted from your gross income, you can receive a significant tax deduction, which can put you in a lower tax bracket.
  • Convenience—Many people appreciate the debit card that comes with most HSAs. This makes it convenient to immediately pay for medical expenses, such as prescription drugs. Consider how you can easily use your debit card at ATMs for accessing cash. Furthermore, while waiting for medical bill to reach your mailbox, you can call a billing department and pay your bill just by using a debit card.
  • It’s easy to set up an account, either physically at your local bank or online. The process doesn’t involve any paperwork. All you do is check the appropriate boxes as well as sign a form and make a deposit.
  • Portability is another perk. If you leave your job or change employers, your account remains with you.

Disadvantages

HSAs also have a few disadvantages, including:

  • Unexpected healthcare expenses—Keep in mind that your healthcare expenses could be more than what you expect, meaning you may not have enough money saved in your account for covering costs.
  • A high deductible requirement is another disadvantage. Although you pay less in monthly premiums, it can still be hard to have a sufficient amount of cash for meeting a high deductible.
  • The pressure to save can be a drawback, especially for healthy people. 
  • Being older can be a disadvantage because an HSA mostly benefits younger Americans. Consider how you have to be able to make regularly contributions to your account and how this can be difficult, or even impossible, when you become ill and can’t work. Therefore, older people or people who tend to get sick more can fail to reap the benefits of having an HSA.
  • Record-keeping can become a time-consuming task. You’ll need to keep accurate records of all your receipts as evidence that your withdrawals have been used for eligible healthcare costs.
  • Monthly maintenance fees or per-transaction fees are charged by some HSAs.

Considerations and Warnings

  • After turning 59½, you have the option of withdrawing your money to pay for non-healthcare costs. Then, you can use it to pay federal income taxes. In other words, if you don’t need the money for healthcare costs, you can use it, in the future, much like you would use an IRA.
  • If you withdraw funds for non-qualified costs before turning 65, you have to pay taxes on the money, in addition to a 20 percent penalty. Once you turn 65, you’ll still owe taxes, but you won’t have to pay the penalty.

Before you make any decisions, it’s important that you compare your options. For example, you need to examine monthly premiums, co-plays, coinsurance and other cost elements. To learn more about the pros and cons of HSAs and how you can save on healthcare costs, please contact us.