How to Get the Most Out of Your Health Savings Account

Triple tax-free HSAs can help pay medical bills and boost retirement savings

By Sharon Anne Waldrop
Originally Posted On September 27, 2013

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Employers are increasingly offering high-deductible health insurance plans, sometimes pushing them on workers. If your company is getting on that bandwagon, you ought to consider signing up for a Health Savings Account, or HSA, which works hand-in-glove with a high-deductible plan. Many firms with high-deductible plans offer HSAs, but if yours has a plan and no HSA, you can get an account on your own at a financial institution.
 
An HSA is a triple tax-free account that can help you shoulder rising out-of-pocket medical costs. Your money goes into the account before it’s taxed, grows tax-deferred and can be withdrawn tax-free to pay unreimbursed medical expenses, including your deductible and health costs that aren’t covered by your plan.
 
HSAs vs. FSAs

Don't, however, confuse an HSA with the similar-sounding health care FSA, or Flexible Spending Account, as nearly 75 percent of people responding to a recent Fidelity Investments survey did.

While you can use both accounts to pay health bills, there are two big differences: 1) An HSA lets you roll over any money you don’t spend by Dec. 31 and 2) After age 65, you can withdraw money for nonmedical expenses without owing a tax penalty. (Those withdrawals are taxed as income, as with traditional IRAs.) An FSA, by contrast, is a use-it-or-lose it account; if you don’t spend the money you’ve put in before year’s end, it disappears.
 
To take advantage of an HSA, you can’t be enrolled in Medicare or claimed as a dependent on another person’s tax return and your health plan must be what’s known as a Qualified High-Deductible Plan. That means its annual deductible must be at least $1,250 for individuals, $2,500 for families.

Contribution Limits for HSAs

If you sign up for an HSA and you’re under 55, you can put in up to $3,250 this year for an individual account and as much as $6,450 for a family plan. The maximums are $4,250 and $7,450 for people over 55. The annual limits will rise in 2014 to $3,300 for an individual and $6,550 for a family (add $1,000 to each for people over 55), says Linda Huber, senior vice president and employee benefits practice manager for Heffernan Insurance Brokers in St. Louis.

7. An HSA is especially worth considering if you’re already maxing out your 401(k)-type plan and IRA. “It’s another avenue to fund a retirement account,” Grossmiller says.

8. Be careful about how you'll invest your HSA. Employees are typically given an assortment of investment options, much like 401(k)s.

You probably should avoid putting all the money into stocks or equity mutual funds, due to the volatility of the market. “Since the purpose of an HSA is to pay for medical expenses, it is important to balance risk, especially in newer accounts that will have lower balances,” Grossmiller says. The last thing you’ll want is a medical emergency and no money to pay for it.

Sharon Anne Waldrop writes about finance, insurance, green living and health topics for Next Avenue, Good Housekeeping, Woman’s Day, Bankrate.com, Creditcards.com, and many other national magazines and websites.