What is a Health Savings Account?
First, it’s important to know what a health savings account (HSA) is. An HSA is combined with a high-deductible health plan and lets you save what you don’t use for the future. Part of the monthly premium you pay goes towards the savings account. If you get an HSA through your employer, you will likely make a monthly payment and your employer may contribute a specified amount annually to your account (e.g. $500). This is different from standard health insurance plans where you pay a monthly premium which disappears even if you don’t use your annual deductible. The tradeoff is that generally an HSA has a higher deductible or monthly premium. However, a higher deductible for the young and healthy generally isn’t such a bad thing since medical expenses are typically pretty low.
What are the benefits of an HSA?
The biggest benefit of health savings accounts is that your contributions have the ability to appreciate on a tax-free basis. The money you put into an HSA, even if it’s from a paycheck, goes into your account without being taxed. Not only that, but assuming you use the money in the HSA for medical purposes, it isn’t taxed when it is withdrawn either. Once your account reaches a minimum balance specified by the bank or investment company your HSA goes through, you can invest it in marketable securities like mutual funds with the potential for higher returns.
There are definitely benefits of using a health savings account medical plan. While you’re young, you’ll likely be in relatively good health so may consider a high-deductible plan anyway which you will have with an HSA. Instead of watching your money disappear, you get to save what you don’t use. Then there’s the big tax advantage too.
How can you get the most out of HSA benefits?
Now that we have discussed the benefits, how can you use an HSA to maximize its utility? Pay for your medical expenses out-of-pocket. This is the most important part about maximizing the value of a health savings account. Don’t use any of the money from your HSA unless it’s an emergency and you absolutely have to. While you’re young, your health expenses likely won’t be much anyways. So you might be thinking, “If I have a savings account specifically for medical care, why wouldn’t I use it? The fact is you’ll spend much more money for health care when you’re older rather than younger, so why not save for much bigger expenses that will occur in the future? HSA plans have minimum amounts, generally around $2,000, required before you can invest your account in the investments. Until then, it will earn minimal interest. If you use the money in your HSA account and it never gets above that $2,000 minimum, you will never see it truly appreciate in value like you would when it’s invested. It would be like “investing” your retirement fund in a savings account rather than achieving much greater returns with some more risk attached to it. Combine that with the fact that your HSA will accumulate tax-free over the course of decades and it will be much more valuable to you when you need it later in life.
David Biggs
Former Peer Counselor
Powercat Financial Counseling
www.k-state.edu/pfc
