Good health care is a privilege many people do not have. The outbreaks of new diseases and a global pandemic have shone a light on this privilege. It is crucial to create viable structures that will help safeguard your health.
While having good health care is not accessible to many, those who do have it have to face the challenge of how increasingly expensive it can be to maintain.
You need a health care plan that is both cost-effective and comprehensive. A Health Savings Account gives you that.
Health Savings Account (HSA)
Health Savings Accounts are savings accounts created to pay for healthcare expenses. They operate much the same way your regular savings account does.
An HSA is beneficial because if, for example, you have an emergency surgery but don’t have the funds to make an outright payment, you can tap into your HSA to help cover costs. View it as the umbrella you keep handy to protect yourself when the “harsh weather of insufficient funds” comes creeping in.
How the Health Savings Account Works
While the Health Savings Account works like a regular savings account, there are a few rules that make it unique and stand out. For one, health savings accounts are not taxed. This is one of its most vital points. The Internal Revenue Service (IRS) lists a few requirements that a person must meet to be eligible for this account.
To be eligible, you must have a qualified high deductible health plan and must not be covered by any other health scheme. Also, you cannot be registered in Medicare or be listed as a dependent on someone else’s tax return.
The contributions paid into the account are cash only and can be paid by both employee and employer but do not belong to the employer. Members of the family can also contribute to the account as long as the account owner is eligible.
When the contributions are made, they are invested and available for medical expenses including dental care, prescription drugs, vision care and medical care.
As an individual, the maximum amount you can contribute annually to an HSA is $3,600. Families have a contribution limit of $7,200 and individuals older than 55 years of age by the end of the tax period can contribute up to $1,000 to their account.
Benefits of Having a Health Savings Account
The HSA was created to help people reduce the high cost of health care expenses. Below are detailed examples of the benefits.
Enrolling in a health savings account gives you ownership of the account. You decide how and when to spend the money. What this means is, if you signed up for the account at the company where you were employed, you would not lose the account if your employment is terminated or you change jobs.
The balance in your HSA is not subject to loss. Every year, the balance rolls over and is added to what you decide to save the next year as long as you stick to the rules and regulations of the IRS.
As mentioned before, health savings accounts are not taxed. This is one great way to handle tax returns. The contributions into the account are deemed as pre-tax if an employer made them. And when you make them, they are tax-deductible. Even better, you are not required to pay taxes on any of the withdrawals made from the account or the growth in the account.
Health Savings Account Balances Can Be Invested
The contributions made to the HSA are not included when it’s time to file your taxes. For example, if you earn $50,000 every year and decide to put $3,000 into your health savings account, the IRS only requires you to file tax returns on the $47,000 balance. Contributions to the account can also be invested in several investment platforms, including mutual funds and stocks. The important thing is to find the right HSA institution that allows you to invest with low fees on the account.
One major concern people have about retirement is spending much of their retirement fund on healthcare. Fortunately, a health savings account offers you an option to use what you saved as your ‘healthcare’ fund after retiring. As the contributions in your account continue to grow yearly, untouched by tax, you are building a robust healthcare portfolio for the future.
This frees up your retirement fund to be spent in other ways.
Contributions from Others
In addition to receiving contributions from you, you can also accept contributions from others within your circle. This circle can include your employer, a relative, friend, or basically anyone who wishes to contribute to your HSA.
What to Consider in Setting Up a Health Savings Account?
Setting up a health savings account will require you to pay attention to specific and very important points and references. Doing this will keep you from making mistakes that will drain your resources rather than help you save money. Some of those points include:
1. High fees
Some institutions will waive the fees or charge a lower rate if you meet the minimum balance contribution. Inquiring about the fees when researching HSAs will keep you from losing a lot of money.
2. Access to a debit card and online management
Consider if the institution offers convenient and simple access to the funds. For example, having access to a debit card and an online platform for your HSA makes using the account more convenient.
3. The processes, terms, and conditions
There are processes involved in setting up an account, making contributions, and making withdrawals. You want the best, the fastest, and the easiest to work with. As you research the administrators, find out how they operate and how easy it is for a person to use their services.
4. Investment options
You can use your health savings account contributions for investments in several investment platforms though not all institutions offer this. Some that do also charge high fees. We advise you to do proper research on the institutions that offer these investment tools before setting up an account.
5. Penalties for non-qualified withdrawals
Non-qualified withdrawals are HSA withdrawals made for non-medical expenses. If an HSA owner below the age of 65 makes a non-qualified withdrawal, an additional 20% tax penalty will be placed on the amount withdrawn.
Where to Set Up a Health Savings Account
Now that you know an HSA is an option, the next step is determining where and how to set one up. You can set up a health savings account with an HSA administrator. An HSA administrator is any IRS-approved financial institution that offers health savings accounts. They hold HSA assets in a secure account and sometimes direct how these funds are invested. Types of institutions include banks, credit unions, brokers, financial advisors and insurance companies. You should also consider asking your place of employment for recommendations, as well.
Each HSA administrator comes with its own rules, processes, and specific plans that they offer consumers. Make sure you do your due diligence and thoroughly research an HSA administrator’s offerings. This will help prevent you from losing money and lead to you saving and earning more!