About Health Savings Accounts

A health savings account is a type of savings account where you can place money for future medical expenses, TAX FREE.  While earlier health plans had many eligibility restrictions, health savings accounts are designed in a way that they can be used by practically everybody.  Low cost health insurance is becoming harder to come by, so it pays to examine all these vehicles.

Such an account is connected to a high deductible health insurance policy.  The money that you save in premiums by taking a high deductible health insurance policy can be deposited into the HSA.  A high deductible policy means you will have to bear higher medical costs before the policy kicks in.  But with the HSA attached to the policy, you will always have money to pay the smaller medical bills until your deductible is met and can then let your larger medical bills be paid for by your health insurance policy.

Yes, all this does sound confusing so we’ll try and make it simpler with a working example:

Suppose you go for a regular health insurance policy that has a small annual deductible of about $250.  You typically have to pay about $300 as monthly premium for such coverage, or roughly $3,600 per year (this assumes just one person covered, not a family).

Now compare this to a high deductible health insurance policy where you have to bear the first $2,500 in medical bills in a given year.  The premium for such a policy would typically be only about $1,500 a year.  Thus, you have saved over $2,000 which can easily be deposited into the Health Savings Account and can be used to meet your medical bills until your deductible is met.  Thus, it always makes better financial sense to go in for the high deductible policy and put the money saved on premiums into your HSA.

But what if you don’t have the $2,000 to put into the HSA, which is why you do not have any affordable health insurance in the first place.  Well, in that case too, you can simply choose a high deductible policy and put in whatever you can afford into your HSA. 

All the money that you put into your health savings account gets accumulated tax free and you never have to pay any tax when you withdraw that money either.  What’s more, if you do not use the money towards medical bills in any given year, it gets carried over until you do need the money.  And if at the age of 65 you still have money left in your HSA, you can then use it for any other expenses, much like a regular retirement account.

Why Start A Health Savings Account?

• Higher premiums paid for regular health insurance policies go to waste if you do not have any medical bills in a given year.  But the money in your HSA can be used in subsequent years too.

• All earnings on the account are tax free.  The deposits made into the account and the premiums paid for the high deductible health policy are also tax deductible.  This can reduce your tax bill considerably.

• You can use the HSA money to get medical assistance from the doctor of your choice and not just doctors that your policy allows.

• An HSA is a great way to save money and not just for medical expenses.  You can put excess money into it and watch it grow tax free for many years.  And after the age of 65, the saved money can be used for any kind of expenses.  So, a health savings account can serve as a health account and a retirement account.

Health savings accounts can make affordable health insurance available to many different people.