One of the financial products gaining a lot of attention lately is the Health Savings Account (HSA). This is because the HSA makes it possible for you to set aside money for your medical expenses without a lot of trouble. And because HSAs are connected to high deductible health plans (HDHP), they are usually used in conjunction with lower premiums.
I am pretty happy with my HSA. I have a HDHP, so I pay more out of pocket, until the deductible is reached. However, I pay half the monthly premium that I used to. I put the money I save into a HSA, to use to help pay the out of pocket medical costs. As a result, more of my money is mine, instead of going to the insurance company.
That’s the important thing to remember about the HSA. The money is yours. No matter who is offering the account, the money is yours. It’s even possible for you to open a HSA with a custodian that isn’t your employer’s choice, or your health plan’s choice. And you can rollover your HSA to another custodian as you like.
In essence, if you do it right, having your HSA can be like having another investment account.
Investments in Your HSA
An HSA actually combines the best element of a Traditional IRA (tax deduction for contributions) with the best element of a Roth IRA (tax-free growth). Additionally, it’s possible to hold various investments in an HSA. Most HSA custodians offer money market type assets, so the returns aren’t that great. However, it is possible to find some independent HSA custodians that will allow you to choose to hold various index funds (there are a few custodians that offer Vanguard funds), or even stocks. Of course, the riskier the assets you include in your HSA investment, the greater the chance that your account loses value during a market event.
The money grows in your HSA as it would in any IRA. However, you do have to be careful about how you use the money. You can withdraw the money — contributions and earnings — anytime for qualified medical expenses penalty-free. If you use the money for non-medical expenses, though, you will have penalties. You will have to pay taxes on the withdrawal as though it is regular income. And you will have to pay a 10% penalty on top of that. Additionally, for family plans, the HSA contribution limit for 2012 is $6,250 (the limit for singles is $3,100). That means you can put more in the HSA than you can in an IRA. And, even though the HSA is similar to an IRA, it is not considered the same thing so it doesn’t count against your eligible IRA contributions.
Happily, though, once you reach age 65, you no longer have to worry about the 10% penalty. At age 65, that penalty is waived, and your HSA becomes just like another Traditional IRA, and you just pay your regular income tax on the amount you withdraw. If you don’t have a lot of health care expenses, you can save up money over time, rather than paying extra for health insurance that you don’t use very often.
If you have a lot of health care expenses, though, this might not be the route for you. Paying a high deductible when you know that you will hit it every year, plus still have to pay premiums and co-pays later, can drain away your wealth at a rate that might not be replaced by the returns offered by your HSA. Carefully consider your situation before you make that choice.