| Chances are good that you have heard of health savings accounts, but perhaps you aren't too clear about how they work.
An HSA allows you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance and some other expenses, you may be able to lower your overall health-care costs.
The cool thing is that an HSA has a unique triple tax benefit. Your contributions reduce your taxable income, any investment growth within the account is tax-free and qualified withdrawals (ones used for medical expenses) are also tax-free.
More consumers are now using the tax-advantaged accounts to save for future health-care costs. Before deciding on an HSA, it makes sense to weigh the pros and cons.
So here goes:
Pros: Typically there is no initial deposit required to open an account. HSAs are portable and you can change trustees once every 12 months. Any employer contributions are not counted as income and you can claim a tax deduction for contributions you make and for contributions a family member makes. Funds can be used to pay for qualified medical expenses for a spouse and dependent children, even if they are not covered under your health plan. After retirement, funds can be used to pay for Medicare or Medicare Advantage plan premiums (but not Medigap policies). After age 65, withdrawal of funds for non-medical uses will not be hit with the 20% penalty assessed by the IRS, although these withdrawals are considered as taxable income. Funds can be transferred out of your investment portion of your account (typically mutual funds or stocks) as needed to pay for approved medical expenses.
Cons: Withdrawal of funds for non-medical purposes prior to age 65 are considered taxable income and a 20% penalty is also assessed by the IRS. Some big box stores and other merchants don't accept HSA cards and you will have to obtain reimbursement from your HSA trustee. If you are claimed as a dependent on someone else's tax return, you are not eligible for an HSA. Expenses can be audited by the IRS so you will have to keep receipts for all purchases. Interest rates on HSA accounts are low and some trustees charge a monthly fee if your balance drops below a certain threshold. If you don't stop contributing to your HSA six months before you apply for Social Security benefits, tax penalties may apply. After an individual has reached age 65 (Medicare eligibility age), additional contributions (including catch up contributions) can no longer be made, even if you're still employed. Minimum balance requirements may apply before you can invest; investment options may be limited and investments are not insured.
Like any health-care option, HSAs have advantages and disadvantages. As you weigh your options, think about your budget and your health-care needs in the years ahead.
For more cool stuff like this, be sure to visit CNBC's Financial Advisor Hub and CNBC + Acorns Invest in You: Ready. Set. Grow. |
EmoticonEmoticon