Is a Health Savings Account (HSA) Right for You?

Medical expenses are one of the primary financial concerns facing Americans today. Healthcare costs continue to rise and medical debt can be crushing to even those on the upper spectrum of the income ladder. When we’re young, it’s hard to fathom saving money for medical expenses since there’s so much else to fund like retirement accounts, student loan debt, mortgages, and child care. But as our age creeps up, so does the likelihood that we’ll need to utilize the healthcare system.

There are plenty of tax-efficient ways to save for retirement or future costs like college and one specific account exists entirely for health expenses – the Health Savings Account (HSA). An HSA provides a vehicle where consumers can save a portion of their income pre-tax and use the funds to pay for qualified medical expenses. Of course, not just anyone can open an HSA. Here’s how to determine if a Health Savings Account is right for you.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

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What is a Health Savings Account?

Like an IRA or 529 Plan, an HSA is a tax-deferred savings vehicle that allows eligible participants to write off their contributions as long as the money is spent on qualified medical expenses. You might have noticed two key catchphrases in that last sentence – eligible participants and qualified medical expenses.

HSAs are custodial accounts only available to people with a high deductible health insurance plan (HDHP). This means the plan enrollee has a low monthly premium but high out-of-pocket costs for services. HDHPs can be sponsored by an employer or purchased individually through the marketplace. In fact, the government marketplace will list if a specific health insurance plan is HSA-eligible right on the website.

For 2021, the minimum annual deductible to qualify as an HDHP is $1400 for individuals and $2800 for families. In addition to having an HDHP, you must not be enrolled in Medicare or have any other type of health insurance. You also cannot be claimed as a dependent on someone else’s tax return.

Contributions to an HSA can be deducted from your taxable income up to $3,600 for individual plans or $7,200 for family plans in 2021. You’ll need to report all HSA contributions to the IRS on your yearly tax returns (you’ll need Form 8889).

Benefits and Drawbacks of Health Savings Accounts

The most obvious benefit of the HSA is the tax treatment. Individuals who qualify and contribute to HSAs get several tax benefits. First, all contributions up to $3600 (or $7200 for families) can be deducted from your annual tax return. Second, the funds in the account can earn interest without taxation while waiting to be spent. (You can buy stocks and mutual funds in an HSA). And finally, if used for qualified medical expenses, you won’t pay any taxes when taking distributions from the HSA either.

‘Qualified medical expenses’ is a broad category. Many different types of medical and dental expenses are included, such as copays, prescription drugs, chiropractor visits, hospital services, medical equipment like hearing aids and mobility devices, birth control, eye exams, and more. Elective procedures and life insurance premiums are two things that cannot be covered with HSA funds.

The primary drawback of HSAs is that in order to be eligible for one, you need to have a less than ideal health insurance plan. You’ll need to put aside money outside of the HSA in order to pay your deductible first, and that could create an unnecessary financial burden. Also, if you fund your HSA over the IRS limit for the year, you’ll be hit with an additional 6% tax on those funds (plus whatever taxes you’d pay normally since excess contributions aren’t tax deductible).

Should I Get a Health Savings Account?

An HSA can be a literal lifeline if you find yourself in a pile of medical debt, but they aren’t for everyone. A Health Savings Account requires a high deductible health insurance plan, which means high copays and costs in exchange for low monthly premiums. The tax benefits are nice, but you need to be sure they offset any potential cost increases attributable to the HDHP.

When considering if a Health Savings Account is right for you, know that it depends greatly on your own unique financial situation. If you can afford to pay for a low deductible health insurance plan that has higher monthly premiums, you might find that’s less of a hassle than navigating a high deductible plan while funneling money into a new savings account (while keeping on top of IRS rules and contribution limits). Plus, there’s always the chance that you won’t need the money in an HSA for a very long time and it could have been better utilized in a retirement account.

As always, consider talking with your financial advisor before opening a tax-deferred vehicle like an HSA. It might be appropriate if certain conditions are present, but only in the right situation.

Speak With a Financial Advisor

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.


The options voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.