What is a Health Savings Account (HSA)?

If you do not know the difference between a Health Savings Account (HSA) and Health Reimbursement Arrangement (HRA), you should start by reading this earlier post. I want to focus this blog post on the reason why every person should consider a Health Savings Account (HSA) qualified plan when buying a personal policy.

What is a Health Savings Account?

Health Savings Account, or HSA qualified plans allow you to set up a health savings account at any financial institution that offers these types of services (your personal bank might be a good place to look first). Health Savings Accounts combine the benefits of both tradition and Roth 401(k)s and IRAs to cover medical expenses. The contributions to an HSA are 100% tax deductible and the funds can be used tax-free for qualified medical expenses at anytime. Professor Pilzer likes to call HSAs “IRA on Steroids” because they offer a triple tax advantage:

1. Tax-deductible contributions,

2. Tax-free accumulation of interest and dividends, and

3. Tax-free distribution for qualified medical expenses.

Should I Contribute to a Health Savings Account or 401k?

Every person should contribute the max amount into their HSA each year before they contribute to any other type of retirement account. IRAs and 401(k)s are great vehicles, but they require you to pay state and federal taxes on all distributions. HSAs are treated the same as IRAs and 401(k)s for distributions on anything other than qualified medical expense, but distributions for qualified medical expenses are tax-free at any time.

How a Health Savings Account Works When You Retire

After you retire, your HSA becomes one of your most valuable retirement vehicles because it offers tax free dollars for one of your biggest expenses - medical care. In contrast, if you put all your retirement into an IRA or 401(k), you will be required to pay taxes before paying for medical expenses.

Health Savings Account Qualified Plans Are Typically Less Expensive

In addition to the tax advantages, HSA qualified plans are typically more affordable to purchase. Most plans offer first dollar preventive care and low or 0% coinsurance after the deductible. Reviewing another of Tyler’s post, HSA help you set aside dollars to insure more on your own. This will help you continue to save money on health benefits year after year.

Note: This should not be taken as legal or tax advice.