You need to maintain an HSA (Health Savings Account) considered to be a personal savings account meant to be used for medical expenses only. You need to get enrolled in an HDHP (high deductible health plan) to be eligible for it. HSAs do offer substantial tax benefits. Few people tend to use it as retirement plans besides IRA or 401(k) accounts. Pretax dollars are used to make HSA contributions. Thus, money invested in the HSA will not attract income tax, thus allowing you to save some money annually.
However, if not used properly, then money kept in the HSA account can prove to be expensive to access. In such a case are to pay income taxes along with a penalty of 20% on withdrawing funds for non-qualified expenses from this account. This is before 65 years of age.
Pros of Health Savings Account
1. Others may contribute:
Anyone can contribute towards this fund like you, a relative, an employer, or anyone else. For employers, it is a choice whether to contribute or not. Even self-employed people can fund it.
2. Most expenses qualify:
Few eligible Future health expenses include a variety of mental, dental, and medical health services. You can find them in detail in 502 IRS publication, Dental and Medical Expenses.
3. Tax deductible after contributing tax:
Contributions made with after-tax dollars will enable you to make deductions from gross income on tax returns. This, in turn, reduces the annual tax bill. The additional amount can be deposited to reduce the financial burden. The deadline is until last date of IRS tax filing.
4. Pretax contributions:
Employers can make contributions made through payroll deductions using pre-tax dollars. This means the employer is not likely to withhold taxes on such dollars. Money will not be included within gross income, thus being outside the purview of federal income taxes. It will ensure you have a better Personal savings account.
5. Tax-free withdrawals:
HSA withdrawals do not attract federal cases in most cases if used for eligible medical expenses. HSA balance can be used to purchase bonds, stocks and other assets, including Health insurance plans thereby encouraging potential returns. Conservative investments like U.S. Treasury bonds are strongly suggested.
Cons of HSA
1. Pressure to save:
A good number of people are found to be reluctant to invest in Health insurance plans. This is at a time when they need it the most. The reason is they are not interested in investing money in HSA accounts.
2. High-deductible requirement:
HDHP qualification is essential for HSA. However, it can place more Financial burden when compared to other health insurance types. Although monthly premiums paid will be less, even with money present in the HSA, it can be a difficult task. Getting cash to make deductible payments for any expensive medical procedure will be tough.
3. Recordkeeping:
All receipts should be carefully maintained to prove to the concerned authorities. You need to how those withdrawals were made for eligible health expenses which IRS might audit.
4. Penalties and taxes:
You might need to withdraw funds for non-qualified expenses before 65 years of age. In such a case, you are to pay income taxes on the withdrawn amount along with a 20% penalty. On reaching 65, you will have to pay only the taxes and not the penalty from your Personal savings account. You have saved money, however, will be able to access it only after taking a financial hit.
5. Fees:
Transaction or maintenance fee needs to be paid monthly. Although not high, fees are quite higher when compared to any interest earned from your account. At times, such fees get waived on maintaining a certain minimum balance.
Bottom-line
HSA can provide great benefits to those selecting HDHPs. It helps reduce taxes, offsets medical costs, and offers long-term tax benefit saving accounts and Future health expenses.
