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Finances in 55: Is an HSA Right for You

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Health cardOne of the most interesting health care financial products to be introduced in recent years is the Health Savings Account (HSA). A HSA can be a way for you to have more control over your health care dollars, while at the same time providing you with a way to reduce health insurance premium costs and gain a tax advantage. I recently opened a HSA, and I am quite happy with the results.

Brief Overview of the HSA

Before we tackle the question of whether or not a HSA is right for you, let’s take a brief look at how it works. A HSA works a lot like a traditional IRA. You put pre-tax dollars into the account (there are yearly contribution limits), and it grows on your behalf (although you usually don’t get to choose investments, and the interest earned is more on par with a high yield savings account in many cases). In fact, once you reach the age of 59 1/2 you can withdraw money from the HSA with the same rules, paying income taxes on money that isn’t used for health related expenses.

As long as you withdraw money for health care related expenses, the money in your HSA grows tax free, and you can withdraw it at any time. If you withdraw the money for something else, you will have to pay income tax, and a 10% penalty if you aren’t 59 1/2.

The main caveat to the HSA is that you have to be enrolled in a qualified high deductible health plan. This means that you will see lower monthly premiums, but you will have to pay more of your expenses out of pocket, until the higher deductible is met.

Is a HSA Right For You?

The fact of the matter is that a HSA isn’t right for everyone. Before you decide to enroll in the high deductible plan, take 55 seconds to think over your situation:

  1. Consider your current health care needs: The first think you need to do is think about how often you use health care services. If you only make a couple doctor visits a year, and have limited prescription needs, a HSA might be just the thing. However, if you use a lot of health care services each year, paying the higher deductible out of your pocket might not be practical. (13 seconds)
  2. Look at costs of high deductible plans: Go to an aggregate site, and look up information on high deductible plans in your area. Often, these are labeled as “HSA plans” even though you will have to open the HSA on your own. (10 seconds)
  3. Compare possible savings: You should have an idea of what you pay in health care now. Quickly add up what it would cost to pay more out of your pocket, plus your new, lower premiums. Do your potential savings outweigh your current spending? (32 seconds)

My family of three rarely sees the doctor beyond yearly preventative visits, and our prescriptions are limited. As a result, paying out of pocket isn’t that onerous to use — we never met our deductible anyway. With a HSA, we pay half what we did before in premiums, and put the difference in the HSA each month. Our costs haven’t gone down, but because the money in the HSA is ours, it is under our control, and we can use it for co-pays and out of pocket expenses — and it grows on our behalf.

A HSA has worked well for us, but it might not be the best for you. If you regularly meet your deductible, and if you have a chronic condition or make a lot of health care visits, you might be better off with the plan you already have.

(Photo: Cliph)

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5 Responses to “Finances in 55: Is an HSA Right for You”

  1. Corinne says:

    My husband and I have a HDHP with HSA right now but are hoping to get comprehensive health insurance with a potential new job. It has worked very well for us the past two years, but we have absolutely NO maternity coverage. It would cost us $10,000 out of pocket in our area for prenatal care plus delivery for one baby. So that’s something to keep in mind if you are planning on having kids.

  2. freeby50 says:

    You really have to look at the specific plans and compare exactly what they do/don’t cover and all the mandatory and potential costs. All the plans are different and HDHP/HSA’s aren’t all alike either. For example while Corinne’s plan has no maternity coverage our HDHP with HSA through my employer has full maternity and newborn coverage. In fact our HDHP/HSA has basically all the same coverage as the traditional co-pay plans offered by our employer. I think our plan may be better than most though. Some HDHP/HSA plans offer pretty skimpy coverage.

    I think an HDHP/HSA plan can be a great choice for many people. But it really does depend on the plan and your individual family’s needs.

  3. evelyn says:

    I think it’s also important to point out that some states tax HSAs (like California).

  4. Mike says:

    Great article! Many people assume that the HSA is only for the healthy. Not so!

    When I am quoting the HSA for clients, they will many times save enough money to fully cover their upfront deductible and then some.

    To compare an HSA to a “normal” plan, I recommend looking at a maximum exposure analysis. Take the annual premium for the plan and add that number to your annual maximum out of pocket. It can give you a better idea on what the best value is. Some of the premium plans will have families paying an extra 4 or 5 thousand dollars over the worst case scenario HSA.

    Example:
    Option1: HSA Premium $6,000 per year with a $10,000 Max out of pocket for your family
    Exposure:$16,000

    Option 2: PPO with copays and small hospital deductible
    Premium: $12,000
    Annual max out of pocket: $5,000
    Exposure: $17,000

    In this case, you have the opportunity to save $6,000 in premium but in the worst case scenario, the HSA will still cost you less money.

  5. Charles says:

    i have HSA through my employer. I love it so far, but so far i haven’t had ay major health issues. i think i’ll realize if this is a good plan when i do need it for a major procedure and need to pay some money out of pocket.


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