What are the Benefits and Risks of a Health Savings Account?

A Health Savings Account offers numerous benefits, making it an attractive option for those looking to manage their healthcare costs while also saving for the future. 

The IRS announced an increase to the maximum Health Savings Account contribution limits for 2024. The new contribution limit is $4,150 if you are single and $8,300 for families. If you are over the age of 55, you can contribute an extra $1,000 to your HSA. This amount will remain unchanged in 2024.

In this article, we’ll explore the many advantages of having a health savings account and how it can benefit you and your family. From tax savings to investment opportunities, an HSA provides a wide range of benefits that can help you take control of your healthcare expenses and financial future.

What is a Health Savings Account (HSA)?

A Health Savings Account, or HSA, offers tax advantages for individuals looking to save money for medical expenses. HSAs can be used to cover qualified medical costs such as deductibles, copayments, and coinsurance. These accounts are only available to those with high-deductible health plans (HDHPs), which have higher deductibles than traditional health insurance plans. HSAs are designed to help individuals save for medical expenses while also providing tax benefits.

What are the benefits of HSAs?

Health Savings Accounts (HSA) have been around for quite some time, and they have grown in popularity over the years. It’s a financial tool that allows people to put money aside for medical expenses. With the rising costs of healthcare, HSAs are becoming an increasingly popular financial tool to help people manage their medical expenses. Here’s a look at a few of the key benefits

Funds saved from lower insurance premiums can be allocated to an HSA

One of the main advantages of opening an HSA is that it works with a High Deductible Health Plan (HDHP). HDHPs have lower premiums than traditional health plans. With lower premiums comes the advantage of having extra funds that you can allocate towards HSA contributions.

Funds roll over each year and remain with the account holder

Another advantage of having an HSA account is the HSA funds roll over each year and remain with the account holder if they change jobs. Unlike other healthcare accounts, there are no “use it or lose it” rules. The flexible nature of HSA accounts allows individuals to manage their medical expenses and plan accordingly.

Save money to cover high out-of-pocket medical costs

From copays to deductibles, healthcare costs can really add up, especially if you have a major medical event like surgery. With an HSA account, people can save money ahead of time to cover these expenses. This is crucial for people with high out-of-pocket medical costs and should be factored into their monthly budget.

Apply funds toward dental, eye care & over-the-counter medications

HSAs are not only for primary care expenses but can also be used for other qualified medical expenses. For example, if you need new glasses, you can pay for them with your HSA account. HSA accounts can also help pay for medical and dental expenses and other specialty care expenses like orthodontics, fillings, and other procedures. Additionally, HSA accounts are great for purchasing over-the-counter medications like pain relievers, allergy medication, and more. For example, if you regularly use allergy medication, purchasing it with pre-tax dollars through your HSA can save you money in the long run.

Key benefits of opening an HSA with Interior Federal

HSAs allow you to make tax-deductible contributions, accumulate earnings on a tax-deferred basis, and withdraw money tax free to pay for qualified medical expenses.

• Get up to 0.20 APY* on balances
• No minimum balance requirement
• No opening deposit requirement

If you use the funds for qualified medical expenses, those withdrawals are tax-free.

But what exactly qualifies as a “qualified medical expense”? 

Generally, it includes most healthcare services and products that are considered medically necessary. This can include everything from doctor’s visits and prescription medications to medical equipment and even certain alternative treatments.

Remember, HSAs are designed for individuals with high-deductible health plans, so it’s important to make sure you meet the eligibility requirements before opening an account. Additionally, it’s important to note there are limits to how much you can contribute each year to your HSA, so it’s important to plan your contributions accordingly.

Finally, don’t forget that having a primary savings account is a requirement for opening an HSA. This ensures you have a financial safety net in case of unexpected medical expenses.

To make the most out of your HSA, consider taking advantage of our convenient digital banking services. With online and mobile banking, you can easily track your contributions and withdrawals, as well as monitor your account balance. This makes it easier to stay on top of your healthcare expenses and make informed decisions about your HSA.

Risks and considerations when opening a Health Savings Account (HSA)

Opening a Health Savings Account or HSA can be a great way to help set yourself up for financial freedom. It offers a triple-tax advantage: no taxes on contributions made, investment growth, or withdrawal for qualified medical expenses. However, there are some risks to consider before you open one.

High-Deductible Health Plan (HDHP)

One thing you need to understand is that you must have a high-deductible health plan (HDHP) to qualify for an HSA and you pay more out-of-pocket costs before your insurance kicks in. If you have a chronic medical condition, HDHP can be risky because of the expenses you may incur. Make sure you have enough cash to cover your out-of-pocket costs and that you have a solid understanding of your insurance plan before opening an HSA.

Access to savings

HSAs are flexible and allow you to save and invest money for future medical expenses. If you need money to pay for a medical emergency, you should have a plan in place to be able to withdraw the money from your HSA quickly and efficiently. Keep in mind that HSA rules and regulations change. You’ll need to keep a close eye on changes so that you remain up-to-date on how to access your funds.

Investment risks

HSAs let you invest your money in stocks, mutual funds, and other investment vehicles, which can add up to large gains over the long haul but it can also mean significant losses. If you’re not knowledgeable on investments, it may be in your best interest to avoid putting money into stocks or mutual funds. Not all accounts offer investing options, so make sure to choose wisely.

Contributions and balances

HSAs have limitations on how much you can contribute yearly, and it varies based on the plan. You would need to know how much you can already contribute and how much money you are comfortable saving and investing. Make sure you stay within your yearly contribution limits to avoid a penalty fee.

Tax-deductible Contributions

HSAs offer up-front tax breaks, allowing you to reduce your federal income tax. However, determining your tax benefits can be tricky since they might change depending on legislative changes. You have to be aware of any changes the government may make to HSAs before investing your money.

A health savings account offers numerous benefits that can help individuals manage their healthcare costs while also saving for the future. From tax savings to flexibility and lower insurance premiums, an HSA can be a valuable tool for anyone looking to take control of their healthcare expenses and financial well-being. However, it’s important to carefully consider the potential risks and limitations that come with opening an HSA, such as high-deductible health plans and investment risks. With proper planning and research, an HSA can provide significant long-term benefits for your finances.

Contact qualified tax professionals, your employer, and/or financial advisor to see if an HSA is the right option for you.

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