Finances in 55: Is an HSA Right for You
One of the most interesting health care financial products to be introduced in recent years is the Health Savings Account (HSA). A HSA can be a way for you to have more control over your health care dollars, while at the same time providing you with a way to reduce health insurance premium costs and gain a tax advantage.
I recently opened a HSA, and I am quite happy with the results.
Brief Overview of the HSA
Before we tackle the question of whether or not a HSA is right for you, let’s take a brief look at how it works. A HSA works a lot like a traditional IRA. You put pre-tax dollars into the account (there are yearly contribution limits), and it grows on your behalf (although you usually don’t get to choose investments, and the interest earned is more on par with a high yield savings account in many cases). In fact, once you reach the age of 59 1/2 you can withdraw money from the HSA with the same rules, paying income taxes on money that isn’t used for health related expenses.
As long as you withdraw money for health care related expenses, the money in your HSA grows tax free, and you can withdraw it at any time. If you withdraw the money for something else, you will have to pay income tax, and a 10% penalty if you aren’t 59 1/2.
The main caveat to the HSA is that you have to be enrolled in a qualified high deductible health plan. This means that you will see lower monthly premiums, but you will have to pay more of your expenses out of pocket, until the higher deductible is met.
Is a HSA Right For You?
The fact of the matter is that a HSA isn’t right for everyone. Before you decide to enroll in the high deductible plan, take 55 seconds to think over your situation:
1. Consider your current health care needs
The first think you need to do is think about how often you use health care services. If you only make a couple doctor visits a year, and have limited prescription needs, a HSA might be just the thing.
However, if you use a lot of health care services each year, paying the higher deductible out of your pocket might not be practical. (13 seconds)
2. Look at costs of high deductible plans
Go to an aggregate site, and look up information on high deductible plans in your area. Often, these are labeled as “HSA plans” even though you will have to open the HSA on your own. (10 seconds)
3. Compare possible savings
You should have an idea of what you pay in health care now. Quickly add up what it would cost to pay more out of your pocket, plus your new, lower premiums. Do your potential savings outweigh your current spending? (32 seconds)
My family of three rarely sees the doctor beyond yearly preventative visits, and our prescriptions are limited. As a result, paying out of pocket isn’t that onerous to use — we never met our deductible anyway. With a HSA, we pay half what we did before in premiums, and put the difference in the HSA each month.
Our costs haven’t gone down, but because the money in the HSA is ours, it is under our control, and we can use it for co-pays and out of pocket expenses — and it grows on our behalf.
A HSA has worked well for us, but it might not be the best for you.
If you regularly meet your deductible, and if you have a chronic condition or make a lot of health care visits, you might be better off with the plan you already have.