Will an HSA Slow The Bleeding From Your Medical Bills?

A Health Savings Account may help you save on taxes while socking away money for medical expenses, but it’s not the right bandage for every family’s budget.

First off, you have to be eligible. We’ll explain what that means in a minute. If you are eligible, there’s still time to apply an HSA’s therapeutic deduction to your 2014 tax return as well as setting yourself up for 2015.

Here’s how it works: Money you contribute to your HSA established at a bank or brokerage goes in tax-free, earns interest tax-free and may be withdrawn tax-free anytime if you use it for medical expenses — kids’ braces now or even Medicare premiums after retirement.

That could mean up to a 30 percent savings in taxes on the contributions, says Wells Fargo.

Once established, the account is yours and goes with you when you change jobs. In some ways, it’s like a 401(k) or IRA for medical bills; it also has characteristics of a Flexible Spending Account (FSA), but without the use-it-or-lose-it gamble.

HSAs and high-deductible health insurance plans were launched in 2004 to help control health care costs, says the Mayo Clinic in Rochester, Minnesota.

“The idea is that people will spend their health care dollars more wisely if they’re using their own money. In addition, doctors and other health care providers will have an incentive to lower their rates because they’re competing for business,” Mayo says.

Are you eligible?

Only a worker younger than 65 with a qualifying “high-deductible health plan” (HDHP) and no other health insurance to draw on may establish an HSA, says the Treasury Department. If you’re older than 65, you can draw on your existing HSA, but you’ll pay a penalty if you contribute to it while on Medicare.

By the numbers

For 2015, the HDHP’s annual deductible must be at least $1,300 for individuals and $2,600 for families. Its out-of-pocket maximum cannot be more than $6,450 for individuals and $12,900 for families. Your maximum contribution to the account is $3,350 for an individual, $6,650 for a family.

For 2014, the deductible was $1,250 for individuals, $2,500 for families; out-of-pocket maximums were $6,350 individual, $12,700 families. You have until tax filing deadline of April 15 to establish an HSA and contribute up to $3,300 for an individual or $6,650 for a family and reflect a reduction in salary on your income tax return. (If you had a qualifying plan for only part of the year, your contribution limit will be lower.)

For either year, catch-up contributions of $1,000 are available for those age 55 and older.

About 21 percent of workers are covered by high-deductible health plans, according to the Bureau of Labor Statistics. Employees at the nation’s smallest firms, with one to 100 workers, are more than twice as likely to be covered by high-deductible health plans those in the largest companies, with more than 100 workers, the BLS estimates.Employers and others say they like HSA-qualified HDHPs because they “can bring both consumer choice and flexibility back into health care by increasing incentives for consumers to compare costs and demand better value,” says Dr. Stephen D. Neeleman in The Complete HSA Guidebook, published by HealthEquity, Inc., a publicly traded non-bank custodian of HSAs.

Interest in HSAs on the rise

More people are pumping up their HSAs.

HSAs grew to an estimated $22.8 billion in assets and almost 11.8 million accounts as of June 30, 2014, according to the latest semi-annual survey by Minneapolis-based Devenir, an HSA investment firm. That is a 26 percent growth in HSA assets and 29 percent boost in the number of accounts compared with a year earlier.

A separate survey by the nonpartisan Employee Benefit Research Institute (EBRI) reveals people younger than 25 had an average of $697 in their HSA at the end of 2013, compared with $3,780 among those ages 55 to 64. People 65 and older averaged $4,460 balances, EBRI said.

The average annual amounts withdrawn for claims also increased with age, EBRI says. People younger than 25 had an average annual distribution of $667, compared with $2,335 among those 55 to 64 and $2,017 for those 65 and older.

A little caution

If you think you might need expensive medical care in the next year and would find it hard to meet a high deductible, an HSA might not be your best option, the Mayo Clinic says. Information about the cost and quality of medical care can be difficult to find, it warns.

Withdrawing money from your HSA for non-medical expenses before you turn 65 will trigger taxes on the money plus a 20 percent penalty, the IRS warns. After age 65, the penalty goes away, but you must still pay taxes on the withdrawals.

You must keep records of medical spending, such as for doctors and prescription drugs but not for over-the-counter aspirin, for example, and report distributions from your HSA, the IRS says.

While money paid by your employer into an HSA reduces your income and likely your current tax liability, the contribution dings your Social Security earnings record, which in turn could bleed some cash from your monthly benefit when you retire. But that future reduction may be more than offset by the tax savings. You can use Social Security’s online calculators to see how your situation would be affected.

“As an HSA owner you’ll likely do better than break even each year if you are in good health,” says Patricia Q. Brennan, a certified financial planner and senior extension trainer at Rutgers New Jersey Agricultural Experiment Station. “With the savings on your insurance premiums, you should be able to accumulate a sizable nest egg.”

For more tips on the advantages of a HDHP and how to maximize those benefits, check out this video. Let us know how you are managing your health care costs in the comments below or on Money Talks News Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
Half of All Retirees Say They Fear This
Half of All Retirees Say They Fear This

Chances are good that you share this fear. Here’s a way to overcome it.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

5 Reasons You Should Retire Sooner, Not Later
5 Reasons You Should Retire Sooner, Not Later

Waiting until age 70 to retire isn’t for everyone. Could you be waiting too long?

4 Ways the Social Security System Will Change in 2020
4 Ways the Social Security System Will Change in 2020

These adjustments will impact both workers and retirees in the new year.

The 5 Most Expensive U.S. States for Retirees
The 5 Most Expensive U.S. States for Retirees

If you have or expect to have a modest retirement income, you may want to avoid spending your golden years here.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

Why Cloth Masks May Increase Your Coronavirus Risk
Why Cloth Masks May Increase Your Coronavirus Risk

A new study finds that wearing a cloth mask can backfire if you don’t clean it properly.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

This Is the Cheapest Place to Buy a Used Car
This Is the Cheapest Place to Buy a Used Car

Looking for a good deal on a set of wheels? This should be your first stop.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.