It’s not uncommon for a young adult to have a high deductible insurance plan. These plans have low monthly premiums in exchange for a much higher deductible. It’s an attractive plan because healthy people don’t expect to get sick, so they want to pay the least amount for health insurance. It’s a risk young adults are willing to take, but is there a way they can mitigate financial risks in the case of a medical emergency? In fact there is, it’s a health savings account.
A health savings account (HSAs) is like a personal savings account, but instead of using the money for a rainy day, the money is meant to be used for health care expenses. The account is owned and controlled by you, not your employer or insurance company.
Here’s everything you need to know when it comes to a health savings account.
How Does a Health Savings Account Work?
Not everyone is eligible to open a HSA. Only individuals who have a high deductible health plan can open an HSA. A high deductible health plan is defined as a plan that has an annual deductible of more than $1,300 for an individual and $2,600 for a family.
A health savings account is different than a regular savings account, not only because the money is meant for health care, but also because the money you put into the account or take out of it is not taxed. The money you put into your account can even reduce your overall taxable income.
Individuals may withdraw money from their HSA to be used non-health related needs, but there is a tax-penalty that must be paid. For anyone under the age of 65, you will be charged a 20% tax on money withdrawn.
There are annual limits to how much people can contribute to their HSA. In 2016, an individual can contribute $3,350 and families can contribute up to $6,750. Anyone older than 55 can contribute another $1,000 annually.
It’s important to note that HSAs are not “use it or lose it.” If you do not use the entire amount you contributed to your HSA in that calendar year, the amount will roll over to the next year. A flex spending account (FSA) which is provided by your employer is the type of savings account that is “use it or lose it.”
What Can an HSA Be Used For?
Health savings accounts were created with the idea that people will spend their own money more wisely on health care than if having an employer pay the majority.
Therefore, the money in your health savings account can be used for any medical expense other than your monthly premium. This includes medical procedures, dental appointments, and vision care among other things.
Are There Disadvantages of a HSA?
People like HSAs because they have control over the amount of money saved and how it’s spent. But there are disadvantages you should be aware of. Here are four of the largest concerns for people who are considering a HSA.
- Budgeting for health care is difficult because your health can be unpredictable.
- Finding accurate information about costs and quality of care can be difficult.
- Saving is difficult for Americans. More than half have less than $1,000 in savings, so actually saving for your HSA could prove to be hard.
- You might not get the care you need because you’re more focused on the amount in your HSA.
How Do I Set Up a Health Savings Account?
To set up a health savings account you don’t need to just go through your insurance company. If you’d like, you can head over to your financial institution of choice. This could be a bank or a credit union. These institutions will be give you different options for what type of HSA you want to open. But here are four things to consider before you open an HSA.
How Accessible and Convenient is the HSA?
Most HSAs offer a debit card, but some of the older accounts require disbursement and reimbursement forms. If you do use a bank and get a debit card, how many branches or ATMs in your area are there? Easy to put your money in, harder to take it out.
What are the Fees? What are the fees? Some HSAs have monthly fees while others have per-transaction fees. Like a regular account, there are behavioral fees like overdraft. Know how much your HSA will cost you.
Is There a Minimum Balance? Most HSAs will not have a minimum balance, but they might eliminate any fees if you keep a minimum balance. Find out what that number is. But don’t let that the minimum balance interfere with future decisions to seek medical care.
Are There Investment Options? Some HSAs are only a savings account. Other offer investment options like a mutual fund. Investment options can give your money a higher upside with limited risk. Determine what the type of investments the funds are in, the flexibility you have with your money in a fund, and what the fees are. It’s worth noting that your money is insured (up to a certain amount) in a savings account, that protection is not extended to investments. Something else you might consider when determining if you should put your money in an investment vehicle.
If you’re interesting in starting a health savings account, know you have options. Be sure to do your homework and based on your health history and current needs. It could be a really good decision for you. If you’d like to speak to an insurance agent about your options, they can give you more information regarding your options.
Image Courtesy of Pictures of Money