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Health savings accounts:
Is an HSA right for you?
Health savings accounts (HSAs) are used to save money for future medical expenses. Ask our HSA consultant today if it's the right choice for you.
Health Savings Accounts
A health savings account (HSA) is an account into which you can deposit tax-free money to be used for future medical expenses. Health savings accounts were established in 2003 and are becoming more common as people want to take more control of their financial future. HSAs are also part of a larger trend known as consumer-directed or consumer-driven health care. HSAs and consumer-driven health care plans have been promoted by companies and the government as one way to help control health care costs. The goal of an HSA is to reduce the money spent on health care by placing more of the responsibility on you to shop for health care.
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Benefits of a HSA |
Potential Risks of an HSA |
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More control over your health care decisions. |
Favors healthy people. Older and sicker people typically pay more. |
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Allows you to set aside and budget money for health care costs. |
Illness is often unpredictable, making it hard to accurately budget for health care expenses. |
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Ability to shop around for care based on quality and cost. |
Some information, including cost and quality, is sometimes difficult to find. |
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Your employer may contribute toward your HSA. |
Pressure to save the money in your HSA might cause you to avoid seeking preventive treatment. |
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Money can be placed in your HSA on a pretax basis or deducted from your taxable income. You can self-direct invest your HSA funds. |
If you withdraw funds from a health savings account for nonmedical expenses before you turn 65, you have to pay taxes plus a 10 percent penalty. |
How do I determine if an HSA is right for me?
The response or need for each person is different, however if you're a relatively healthy person and your dependents are healthy, an HSA may be a good option for you. An HSA allows you to take advantage of lower health insurance and expenses while saving up for future health care expenses. If you have a chronic condition that requires a lot of medical care and expense, an HSA probably is not your best choice.
Who sets-up a health savings account?
You can set-up an HSA on your own through a bank, trustee, or your employer may offer a HSA option. To qualify for a health savings account, you must be under age 65 and carry a high-deductible health insurance plan. This high-deductible health insurance plan must be your only health insurance coverage, and you can't be covered by other health insurance. However having dental, vision, disability and long term care insurance doesn't disqualify you from having an HSA.
Can I use pretax money to fund a health savings account?
If your employer offers a high-deductible insurance plan, you may be able to deposit money into an HSA on a pretax basis. If you open an HSA on your own, you can deduct your deposits when you file your income taxes.
Can my employer contribute to my health savings account, too?
Yes. But the total of your employer's contribution plus your contribution still must be within contribution limits.
Are health savings accounts similar to flexible spending accounts?
Yes, but one key difference is, unlike a flexible spending account, with an HSA you can keep (roll over) any unspent money each year. Also, you can't take money from an employer-sponsored flexible account with you if you quit or take a different job. Money put into an HSA is yours and can be taken with you if you switch jobs or retire. Also, it's important to note that you can't have both an HSA and a flexible spending account.
Can I withdraw money from health savings accounts for nonmedical expenses?
If you withdraw funds from an HSA for nonmedical expenses before you turn 65, you have to pay taxes on it as well as a 10 percent penalty. If you take money out after you turn 65, you don't have a penalty, but you must pay tax on the money taken out. You can still withdraw money tax-free from an HSA for medical expenses after you turn 65.
How much money can I contribute annually into an HSA?
The Internal Revenue Service decides how much you can contribute each year. The limits are indexed for inflation and usually change each year. Unspent money in your HSA can be rolled over each year. Current year contribution limits are as follows:
| Year | Contribution Limit (Single) | Contribution Limit (Family) | Catch-up Contribution (55 or older) |
| 2009 | $3,000 | $5,950 | $1,000 |
| 2010 | $3,050 | $6,150 | $1,000 |
Self-Directed Investing
Funds in your HSA can be invested in a manner similar to investments in your IRA. Investment earnings are sheltered from taxation until the money is withdrawn and can be sheltered even then. So, if you set-up your HSA with a self-direct custodian you can invest the funds in either traditional or non-traditional investments.
While HSAs can be "rolled over" from HAS fund to fund, an HSA cannot be rolled into an IRA or a 401(k), and funds from these types of investment vehicles cannot be rolled into an HSA, except for the one-time IRA transfer allowed by The Tax Relief and Health Care Act of 2006 signed into law on December 20, 2006, added a provision allowing a one-time rollover of IRA assets to be used to fund up to one year's maximum HSA contribution.
Unlike some employer contributions to a 401(k) plan, all HSA contributions belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.
