February 6, 2020
Health Savings Accounts Explained
Health-care costs in the U.S. continue to grow, topping $3.65 trillion in 2018. To ease this burden, the Medicare Modernization Act of 2003 includes a plan that allows consumers to set aside pre-tax money for current or future medical costs. Health savings accounts (HSAs) give consumers more control over their health coverage and provides tax breaks. But even though many people (including the unemployed) are eligible to sign up for an HSA, the savings program may not be the best option for everyone.
High deductible policy required
The accounts must be connected to a high-deductible health policy (HDHP). For plan year 2020, the deductible must be at least $1,400 annually for an individual plan and $2,800 annually for a family plan. Even though higher deductibles usually mean much lower premiums, critics say HSAs are a better deal for families or individuals who have very few health problems and who can afford higher out-of-pocket costs. They may not work as well for families on a tight budget or for those who have frequent or ongoing medical issues.
Once you open an HSA, you can contribute up to the annual deductible under the HDHP, subject to an annual contribution limit set by Congress. The annual contribution limits for 2020 are $3,550 for an individual plan or $7,100 for a family plan. Those who turn 55 by the end of the tax year can contribute an additional $1,000. A taxpayer covered by Medicare Part A and/or B is not eligible to contribute to an HSA. Eligibility is determined monthly, and the above amounts apply to a member who is eligible in all twelve months of a year.
Dollars fund broad range of services
You can withdraw the money tax-free and penalty-free at any time and use it to cover copayments, coinsurance, as well as a variety of medical costs, including:
- Lab expenses
- Physical therapy
- Nursing home costs
- Artificial limbs
- Eyeglasses and contacts
Unlike an employer's flexible spending account that must include a "use it or lose it" rule, you can roll over money you save in an HSA from year to year. HSAs have the potential to build large balances over years of contributions and some strong investment gains. That means participants theoretically could be able to pay for their own health care in their later years, when it is needed most. According to HealthView Services
, retired couples will need to save from $360,000 to $415,000 to cover out-of-pocket medical expenses, not including
the costs of long-term care such as nursing homes.
If you believe an HSA would be a good alternative for you and your family, consider both your financial situation and health status. Experts recommend comparison shopping, as programs and fees can vary. Ask your credit union if it offers or is considering offering HSAs or contact a professional financial adviser to find out more.