What is a Health Savings Account?

Let’s face it, medical expenses can have a major impact on your budget, especially as you get older.

If you’ve heard about a Health Savings Account or maybe your work offers one, then it just may make sense to give it some serious consideration – and, in my opinion, it typically makes a lot of sense.

What is an HSA?

A Health Savings Account, also referred to as an HSA, provides an opportunity for you to use pre-tax money from your income to pay for certain medical expenses.

It also allows you to use the money for other qualifying expenses such as medical equipment, prescribed medicine, and copays.

You can specifically use funds from the HSA on:

• dental treatment
• hospital services
• contact lenses
• chiropractic care, and
• crutches, among others

All in all, you can use the money from your HSA to pay for just about any type of medical expense.

Best of all though, the money you use to pay for these expenses comes out 100% tax-free.

The most amazing thing about an HSA is that it offers triple tax savings.

There is no other account available that offers this type of benefit.

Your contributions are pre-taxed, the growth of the funds within your account is tax-free, and when you withdraw money from your account to pay for qualifying medical expenses, the money comes out tax-free.

Pros and Cons

Advantages Of An HSA

Here are the notable benefits of an HSA and why so many people have chosen to set one up:

• An HSA is a pre-tax benefit. Contributions into the account are made before being taxed. This is extremely beneficial as it can lower the amount you pay in taxes.
• Growth in an HSA is tax-deferred and most likely tax-free. The growth of your investments within your account are tax-deferred and most likely will be tax-free as long as they are used for qualifying medical expenses.
• Money used in an HSA for qualifying medical expenses is 100% tax-free. Thus the power of triple tax savings. Contributions go in pre-tax. Once invested, they grow tax-deferred, and when your money is withdrawn for qualifying medical expenses, it comes out 100% tax-free. There’s no other account in the United States that offers triple tax-savings.
• There is no use-it-or-lose-it concept. The funds in your account are always yours. The only way they go away is if you spend them.
• An HSA is flexible. The money in your account has a wide range of uses including most medical expenses, prescription medications, office visits, eyewear, etc. Another benefit of an HSA is that you may use it for the health expenses of your dependents as well.
• More control over medical expenses. Basically, you’re trading reduced monthly premiums for the possibility of higher out-of-pocket expenses. If you are in good health and doctor visits don’t occur that often throughout the year, then an HSA could allow substantial savings.

Disadvantages Of An HSA

• There is a high deductible requirement. You may find it hard to come up with the required amount of money to meet a high deductible for your out-of-pocket expenses. This can be the case even though you have lower premiums every month.
• The costs of healthcare can show up unexpectedly. You cannot predict the future, and your health expenses may suddenly go beyond what you expected. When this happens, you may find yourself lacking the money needed to pay for medical expenses.
• You have to handle the pressures of having an HSA. You may choose not to seek medical care even when you need it because you do not want to touch your HSA funds or pay for them out-of-pocket.
• There are penalties and taxes. While the HSA is tax-free for medical expenses, that’s not the case if you have to withdraw it for other reasons. When you withdraw money before you turn 65 and it’s for a non-qualified expense, you will be taxed and receive a 20% penalty. However, if you withdraw money for non-qualified expenses you will still pay taxes, but the 20% penalty is waived.
• You must do some recordkeeping yourself. It is important to keep a record of all your withdrawals, healthcare expenses, and the receipts that come with them. They will be your proof that you used them for eligible healthcare expenses.
• There are some fees to pay. While it may vary by institution, your health savings account may require you to pay a fee per transaction or for monthly maintenance. However, these fees are typically pretty reasonable, and the institution may waive those fees if you keep and maintain a minimum balance.

An HSA is just one of the many tools the CFP® Professionals at Robert Gordon & Associates consider when recommending the best path towards meeting financial objectives.

Call us TODAY to sit down with a CFP® Professional and make a plan towards your financial freedom!