If you're enrolled in a high-deductible health insurance plan and are looking to have more control over your health care spending, it might be time to consider opening a health savings account.
Financial adviser Brian Ramsay, with WealthSpan Partners in Davenport, said health savings accounts, or HSAs, are tax-advantaged personal savings accounts that help eligible consumers save money on medical expenses, such as doctor visits and prescriptions.
HSAs are one of the most tax-efficient savings options available, Ramsay said. And, they offer several benefits, including saving for short and longer-term medical expenses.
When used properly, Ramsay said HSAs can be "very powerful tools." Here's some of his advice on whether it may be right for you.
How do HSAs work?
Health savings accounts offer a triple tax break.
"A health savings account is great because, first of all, what you contribute is tax-deductible," he said. "There's no income threshold, so you can make anything and still be able to deduct your contribution into an HSA. Whatever the HSA earns is tax-deferred. And when you use it for medical expenses, you get to take it out of the account tax-free."
HSAs are sometimes offered through employers or health insurance providers. You may also open an account at most financial institutions — but this option can limit your investment options.
Once you open an account, you'll receive a checkbook or debit card to use at the doctor's office or hospital, so you can use the cash funds on eligible expenses at any time.
Once you reach retirement age, 65, and qualify for Medicare, you can no longer contribute to an HSA, but you can still use the money for medical expenses.
Qualifying for a health savings account
If you're enrolled in a high-deductible health insurance plan under the government's guidelines, you can qualify for an HSA.
To qualify in 2019, you must have a deductible of at least $1,350 for single coverage, or $2,700 for family coverage.
Ramsay said you can contribute up to $3,500 to an HSA in you have single coverage or up to $7,000 for family coverage. If you're age 55 or older, you can contribute an extra $1,000 each year.
Personal contributions and potential contributions from your employer, combined, cannot exceed the limit, Ramsay said.
Another benefit of health savings accounts, Ramsay said, is they can be invested in mutual funds and stocks to help boost your money.
"So then you get some earning power behind it," he said. "Contributing to an HSA and growing it in the market over time can really add up."
He recommends individuals with HSAs keep at least two years' worth of deductibles in cash before investing. That cash will help cover any expenses that might come up.
Ramsay said if you open an HSA through a bank, it won't offer an investment feature but will work more like a checking account.
Why consider it?
Ramsay said HSAs are a rare tax-advantaged option, that can help save on medical expenses now and in retirement.
"It's not a secret that health care expenses are becoming a bigger and bigger part of our standard of living," he said. "Because of that, it's nice to have a tool or an account that's basically dedicated to cover unplanned medical expenses. It's a great complement to your other types of retirement or investment accounts you might have."
Ramsay said people with HSAs have until they file their taxes to make a contribution for the previous year, just like IRAs. So essentially, you'd have until April 15, 2019, to make a 2018 contribution.