A health savings account, or HSA, is a tax-exempt personal savings account that can be used to pay for certain medical expenses. An HSA is to be used alongside a qualified high-deductible health plan, or HDHP. An HDHP is a plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more for health care costs before your insurance company starts to pay its share.

What are the benefits of an HSA?

• The money you put in your HSA account is tax deductible
• Funds in your account grow tax-free
• You don’t pay taxes on withdrawals when paying for qualified medical expenses
• Your HSA balance can be carried over year after year
• You may be eligible to invest your HSA similar to a 401K or IRA (in an interest bearing account, a mutual fund, or stocks or bonds)
• You can use your HSA to help add to your retirement funds (After you turn 65 you can withdraw funds from your account for any reason without penalty.)

What are the downsides of an HSA?

• Although you may pay lower premiums each month, it may be difficult for some people to come up with the cash to meet a high deductible
• Unexpected health care costs may exceed what you planned for and you may not have enough money in your HSA account to cover expenses
• Some HSAs charge a monthly maintenance fee or a per-transaction fee
• If you withdraw funds from your HSA for non-qualified expenses before the age of 65 you’ll owe taxes on that money plus a penalty (after 65 you’ll owe taxes but won’t be penalized).
• You need to keep records/receipts to prove that withdrawals were used for qualified health expenses

What can you pay for with an HSA?

You can pay for various medical expenses including, but not limited to: deductibles, copayments, coinsurance, prescription drugs, dental services, vision care, certain psychiatric and psychological treatments, long-term care services and medically related transportation and lodging. You cannot pay for your health insurance premium with your HSA account.

Is an HSA a good choice for me?

If you are willing to set up the account and have the money to fund it, an HSA may be a good choice for you. Ideally you’d like to contribute as much as you can, up to the contribution limit which is $3,450 for individuals and $6,900 for families in 2018. If you can’t afford to contribute the maximum amount, you’d want to contribute as much as you can to help save you money down the road. Your employer may offer this benefit at work and may contribute money to your HSA account.