A Guide to Health Savings Accounts

A health saving accounts (HSA) is a solid way to save for future medical expenses. They have tax benefits in that they reduce the amount of taxable income calculated on income taxes.

Anyone signing up for health insurance has no doubt come across the term health savings account. Many people get bogged down by this term. However, the best way to think about an HSA is to think of it like a regular savings account. It's similar in this regard with the exception that anything saved in an HSA is only used for medical expenses. An individual is responsible for administering the HSA and not an insurance company or employer. Knowing how HSAs work is important when considering one.

The Origin of HSAs
HSAs were created to alleviate the cost of healthcare. Similar to high deductible health care plans, the thought is that most people will be more conscientious about using healthcare dollars if it's their own money. Anyone that is currently enrolled in a high deductible healthcare plan qualifies for an HSA.

How HSAs Work
HSAs are similar to savings accounts. The only difference is that any amount of money in an HSA is not taxable. This means that if someone has $1,000 in an HSA account, this amount of money will not be taxed come tax time. Some insurance companies offer their clients the option to save money in an HSA. If this is not an option, some employers and financial institutions also do the same. Individuals must decide how much to contribute to their HSAs. This amount cannot be more than the government maximum. When someone is contributing to their HSA through his or her employer, he or she can have a specific amount deducted from their paycheck. Clients with HSAs have a card that is linked to their balance. Cardholders can use this card similar to a credit card to make medical purchases. HSAs roll over from year to year so enrollees never have to worry about losing their savings.

Benefits of HSAs
Many people opt to save money in HSAs because of the tax benefits. Any money saved in an HSA reduces the taxpayer's tax rate. For example, someone who makes $50,000 a year and then puts $10,000 into an HSA will be taxed as if he or she made only $40,000 a year. Another benefit of an HSA is that the individual makes the decision on how much to put in it. The health insurance provider may offer guidance but, ultimately, how much to save in an HSA is a personal decision, which provides flexibility.

Disadvantages of HSAs
Because people cannot plan an illness, it can be difficult to determine how much to save in an HSA. Individuals who are older or who have pre-existing health conditions may find it more difficult to allocate money in HSAs. Those who concentrate solely on saving in an HSA may not seek medical attention when they need it. Since HSAs are intended solely for medical expenses, any money that is taken out of an HSA account that is not used toward medical costs is taxable.