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There was a time when almost all businesses and large corporations offered medical benefits as part of an employee’s benefits package. Now, due to the rising cost of health care a large percentage of employees are forced to invest in individual medical insurance because their employers do not offer such benefits. Whether you are an employee or are self-employed and you carry your own individual health insurance policy you may want to educate yourself on health savings accounts pros and cons. HSA accounts can become a powerful financial vehicle for individuals enrolled in a High Deductible Health Plan. Understand the advantages and disadvantages argued by proponents and opponents of HSAs and decide if an HSA is the best way to pay for qualified medical expenses.

What is an HSA?

Before you can review health savings accounts you should have a basic understanding of what an HSA is. A health savings account is a tax-advantages savings vehicle that allows people to save to cover future medical expenses. To take advantage of a Health Savings Account you must be enrolled in a High Deductible Health Plan. The minimum qualifying deductible for a single person is $1100 and families may have a deductible of $2200 or more. HSA’s have become increasingly popular as Americans purchase higher deductible plans to reduce the cost of their traditional health care insurance. Now that you understand what exactly an HSA is, educate yourself on the pros and cons of these tax-advantaged accounts.

HSA Pros

One of the main benefits of HSAs involves taxes. While you are technically putting away from a rainy day, you are also savings hundreds or thousands of dollars in income taxes. This is because all of the contributions made to an HSA are tax-deductible. When you place income into a tax-advantage account you write-off 100 percent of all contributions made. This means that you can lower your taxable income and still have the money available in an emergency. While this is enough for some to open an HSA, there are other benefits as well. Any money in an HSA that is not used towards medical expenses grows tax-deferred like a Roth IRA. When account holders reach 65, they have the option to withdraw their money without paying any taxes or penalties. With HSAs, you get peace of mind in knowing the money is there now while still hoping you can wait until later to use it.

HSA Cons

One of the biggest disadvantages of HSA vehicles is the fact that you have to have a High Deductible Plan to qualify for it. While this may sound like a disadvantage, to some it is not. Many budget-minded consumers would rather save money on their health insurance premiums by taking the risk of having to pay a higher deductible. You should also consider the annual contribution limits set each year. Currently, the contribution limit for an HSA is $3000 for individuals and $5950 for families. Individuals 55 and older may qualify for catch-up contributions much like an IRA.

HSAs are a great financial vehicle for individuals with High Deductible Plans. If you have a high deductible health insurance plan you should save in the event you ever need to use your insurance. One of the best benefits of an HSA is if you do not have to use it, you can carry it with you to retirement.

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