Is a Health Savings Account (HSA) a good idea? What are the advantages and disadvantages?

Personal Finance, Creating Healthy Communities December 08, 2013 Print Friendly and PDF

SavingYour Dollars
SavingYour Dollars
Health Savings Accounts (HSAs) can be established if you have a high deductible policy. The policies may be offered by employers or purchased privately. Individuals open the account at a local financial institution that offers an HSA option. Funds deposited into the account may be made privately or with contributions from employers. The funds cover the out-of-pocket expenses you are expected to pay with your insurance plan and can include vision and dental expenses that are not covered by a separate policy.

Money transferred to the account is non-taxable, and interest earned in the account is also exempt from taxes if used for qualified medical expenses. Because you own the HSA, you will retain the funds if you change employers and have different coverage available.

The funds can be used to pay health insurance premiums when you are between employers (COBRA), to pay long-term care insurance premiums, to pay Medicare deductibles and co-pays, or without penalty to cover living expenses if you are 65 years of age or older. HSA deposits are not "use or lose"; they roll over year to year and accumulate indefinitely.

That final point is probably one of the advantages people see with HSAs. The HSA can become, in essence, a tax-sheltered retirement savings vehicle when it is not needed for healthcare expenses.

The disadvantages of the HSA include:

  • limitations on the contribution amount deposited annually;
  • a limit on the total amount that can be held in the accounts;
  • traditional fees that you must pay the financial institution for management of the account; and
  • record keeping for tax purposes.

As owner of an HSA account, you can make withdrawals at any time for any purpose; however, if the funds are used for expenses that are not qualified medical costs or you are not at age 65+, you will pay standard income taxes on the withdrawal and an additional 20% penalty.

HSAs cannot be opened if you have traditional deductible coverage or after enrollment in Medicare.

For more information about HSAs, see these FAQs:

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.