Should I Get an HSA?

If you’re considering ways to manage healthcare costs, you may have wondered, “Should I get an HSA?”

A Health Savings Account (HSA) can be an effective tool for saving money on medical expenses while enjoying unique tax advantages. But is it the right choice for you?

Let’s explore the HSA pros and cons and how it fits into your financial plan.

What is a Health Savings Account (HSA)?

Health Savings Accounts (HSAs) are tax-advantaged accounts designed to help you save for medical expenses. Contributions are made with pre-tax dollars, and as long as you use the funds for qualified medical expenses, the growth and withdrawals are tax free. It’s a triple tax advantage that sets HSAs apart from other savings accounts.

How HSAs Work

To open and contribute to an HSA, you must have a high-deductible health plan (HDPD.) The IRS defines an HDHP as a plan with a minimum deductible of $1,600 for individuals or $3,200 for families. These plans typically have lower premiums, allowing you to set aside savings from out-of-pocket medical costs.

Employers often contribute to employee’s HSAs as part of their benefits package, providing an additional incentive to enroll in HDHP. Once opened, your HSA funds roll over year to year and can even be invested for growth.

HSA as an Investment Vehicle

One of the most compelling benefits of an HSA is its investment potential. Unlike other medical savings accounts, HSA funds can be invested in stocks, bonds, or mutual funds, enabling long-term growth. This makes HSAs particularly attractive for those who plan to use them as part of their retirement strategy.

Here’s why investing your HSA might be a good idea:

1. Contributions reduce your tax income.
2. Investment growth is tax-deferred.
3. Withdrawals for qualified medical expenses are tax-free.

Leaving your HSA funds untouched can serve as a powerful investment vehicle for future healthcare expenses.

Should I get an HSA?

Deciding whether to open an HSA involves understanding the HSA medical plan’s pros and cons and evaluating your healthcare needs. Here’s when an HSA might be worth it.

When Is an HSA Worth It?

• When you are healthy and have minimal medical expenses. If you rarely visit the doctor, you can let your HSA contributions grow tax-free while paying for smaller expenses out of pocket.
• You’re saving for retirement. HSAs allow you to prepare for medical expenses in retirement, including premiums for Medicare and long-term care.
• You want tax benefits. The triple tax advantage makes HSAs one of the most tax-efficient savings options available.
• You’re comfortable with a high-deductible plan. If you can handle a higher deductible, the cost savings from an HDHP and the ability to invest your HSA funds can outweigh the trade-offs.

HSA Pros and Cons

Before deciding, it’s crucial for you to weigh the health savings account pros and cons.

Pros:

• Triple tax advantage
• Long-term investment opportunities
• Funds roll over year to year
• Can cover some insurance premiums (such as COBRA and Medicare)
• Lower premiums with HDHPs
• Flexibility for qualified medical expenses

Cons:

• Eligibility limited to HDHP enrollees
• Contributions stop at age 65
• Penalties for non-qualified purchases
• High deductibles may be challenging for some
• Limited investment options with employer-provided accounts

Understanding and considering these pros and cons can often help you answer the question, “Is it good to have an HSA?” for your unique situation.

Downsides of an HSA

While HSAs offer many benefits, there are drawbacks to be aware of:

• High out-of-pocket costs. If you frequently need medical care, the high deductible can strain your budget.
• Strict eligibility requirements. Not everyone qualifies, and having other health insurance can disqualify you.
• Tax penalties. Non-qualified withdrawals are subject to income tax and a 20% penalty before age 65.
• Strict contribution limits. Currently, the limits are $3,850 for individuals and $7, 750 for families, which may not meet the needs of those with significant healthcare needs and expenses.

Should You Max Out Your 401(k) or HSA?

If you’re deciding whether to maximize your 401(k) or HSA, consider the following points:

• Tax Benefits. HSAs offer a triple tax advantage, while 401(k) contributions provide tax-deferred growth but are taxed upon withdrawal.
• Healthcare expenses in retirement. An HSA is designed explicitly for medical costs, often significant in retirement.
• Flexibility. Unlike a 401(k), HSA withdrawals for qualified medical expenses are always tax-free.

For many, and perhaps you, the best strategy is to contribute enough to your 401(k) to receive any employer match and then focus on maximizing your HSA contributions.

What Are Qualifying and Non-Qualifying Expenses?

What Can You Use an HSA For?

An example of qualified expenses include:

• Doctor visits and copayments
• Prescription medications
• Vision and dental care
• Hearing aids
• Long-term care services

What Can’t You Use an HSA For?

Non-qualified expenses include:

• Cosmetic procedures
• Gym memberships
• Over-the-counter medications (without a prescription)
• Non-medical personal items like moisturizers or vitamins.

Withdrawals for non-qualified expenses may result in taxes and penalties, so keeping all your receipts and documentation for all HSA-related expenses is important.

Is Investing Your HSA a Good Idea?

Using your HSA as an investment vehicle could be an effective strategy for you if:

• You can afford to pay out of pocket for current medical expenses.
• You leave funds in the account to grow for future use.
• You take advantage of diversified investment options.

Many HSA providers can offer you tools and resources to help you invest your funds strategically, making it a smart addition to your long-term financial plan.

How to Open and Fund an HSA

If you are eligible, you can open an HSA through:

• Your employer
• Health insurance provider
• A financial institution or standalone HSA provider

Dechtman Wealth Management can guide you through this entire process and help you ensure that your HSA aligns with your financial goals.

Funding Your HSA

You can contribute to your HSA through:

• Payroll deductions
• Direct transfers from your bank account
• Contributions from your employer

Make the Most of your Healthcare Savings with Dechtman Wealth Management

Should you enroll in an HSA?

An HSA can be a valuable tool for managing healthcare costs and saving for the future, but it is only for some. If you are still asking yourself, “Do I need an HSA?” we welcome you to reach out and speak with our financial professionals.

At Dechtman Wealth Management, we can help you determine whether an HSA fits your unique financial goals and help you with optimizing your contributions and investment. Schedule a complimentary consultation today to explore how we can support your journey toward a more secure financial future.