Many of us are familiar with individual retirement accounts (IRAs), which can help maximize your retirement nest egg through tax benefits. But did you know that a health savings account (HSA) can help you save for medical expenses with tax advantages much like an IRA? HSAs offer tax benefits including pretax or tax-deductible contributions, plus tax-free earnings and tax-free distributions when used for qualified medical expenses. They are designed to work with high-deductible health plans (HDHPs) so you have more control over your health care dollars – now and in the future.
Whether your health insurance is provided through an employer or purchased on your own, you may notice a growing selection of HDHP options available to you. These consumer-directed health plans can help reduce health care costs through lower premiums, but they also require consumers to pay a greater share of their health care expenses. HSAs were created to help cover these costs.
Who Might Benefit?
Here are some examples of ways HSAs can help you save:
Young, healthy individuals: If you rarely visit the doctor (other than annual checkups and vaccinations), you could build up savings in an HSA rather than spending those dollars on premiums. However, there's always a risk of major medical expenses out of the blue, so it's important to maintain enough savings to at least cover the deductible.
Families with children: Traditional coverage is expensive, putting a crimp on families with tight budgets. An HDHP gives you a break on premium costs so you can direct those savings into an HSA. Preventive care may be 100% covered for you and your family.
Saving for multiple goals: When you're juggling multiple responsibilities – paying for college tuition, supporting aging parents, saving for your own retirement – it's easy to forget about saving for health care costs. With an HSA, you can focus on saving for future medical expenses.
Preparing for retirement, or in retirement: Before and during retirement, HSA funds can be used tax-free to pay for qualifying health expenses. After age 65, HSA funds can be used for expenses other than health care without penalty (though ordinary income taxes will be due), so it's another vehicle for tax-deferred savings.
Considering long-term care: Money from your HSA can be used to purchase long-term care insurance and fund medical expenses throughout retirement.
Changing jobs or moving: An individual – not an employer – owns the HSA and makes decisions about contributions and distributions. So no matter where you go, you will always own your HSA.
Fluctuating health expenses: There are no "use it or lose it" rules as there are with flexible spending accounts (FSAs), so your unspent balance in an HSA accumulates from year to year.
Not federally insured
Not a deposit of this institution
May lose value
Get Answers about HSAs
Who can open a health savings account (HSA)? If you have a qualified high-deductible health plan (HDHP) and you're younger than age 65, you may be eligible to contribute to an HSA. After 65 no new contributions are allowed, but you may continue withdrawing funds from your existing HSA.
What is a qualified HDHP? To be eligible for an HSA program, in 2012 an HDHP must have a deductible of $1,200 or more ($2,400+ for family coverage) and annual out-of-pocket maximum not exceeding $6,050 for individuals ($12,100 for family coverage).
What is the annual contribution limit? For 2012, the limits are $3,100 for individuals and $6,250 for families. If you're age 55 or older, you can contribute an additional $1,000 this year.