In 2003, health savings accounts (HSAs) were established as a way for people to save tax-free money for qualified medical expenses. Since that time, millions of people have created accounts and benefit from the tax savings that comes with an HSA.
HSAs have inherent advantages that other medical savings accounts don’t, but there are a few details about HSAs that make some people nervous to open an account. However, when you look closer, you’ll find that the “worst” things about HSAs can actually be advantageous to accountholders. Here are the three “worst” things about HSAs:
1. High deductibles
Those two words can cause concern for individuals who are making annual benefits elections, especially those suffering from chronic ailments or frequent medical issues. In order to have an HSA, individuals must have a qualified high-deductible health plan.
While, at first, this may seem to be a disadvantage of HSAs, there is a bright side: High-deductible health plans almost always include lower monthly premiums. Depending on individual circumstances, this means the money saved on monthly premiums can help offset the out-of-pocket costs associated with a higher deductible. Accountholders can use the money they save on lower premiums and contribute it to their HSA (up to the annual contribution limit). Additionally, if you don’t have a lot of medical claims, you can save the money in your account year over year and let it grow tax-free.1
2. Annual contribution limits
Because HSAs have great tax advantages, the IRS limits how much people can contribute to their accounts on a yearly basis. For 2018, the limits are $3,450 for single tax filers and $6,900 for families.
That might not seem like a lot at first, but one advantage of HSAs is that, unlike Flexible Spending Accounts (FSAs), the HSA balance rolls over every year. This means that if a family contributes the maximum limit to their HSA each year, after 10 years they can potentially have almost $70,000 in their account — and that is before interest or investing the funds, if possible, which could increase potential earnings.
3. HSA feesWhether you are buying tickets to a show or reviewing your investment portfolio, fees can be a nuisance that hinders your potential account growth. HSAs may include fees also, and while there may not be an upside to this for accountholders, digging a little deeper and doing some homework can help them find HSA providers that offer the lowest fees in the industry.
All HSA providers charge fees, but some charge more than others. A great place to learn more about how much HSA providers charge in fees is to read the Morningstar “2017 Health Savings Account Landscape.” The report lists the most popular HSAs and breaks down their fee schedules. Another resource includes HealthEquity’s blog post titled “How much does an HSA cost?”
HSAs can be a great way for people to save for qualified medical expenses, and while there may seem to be some disadvantages of HSAs, digging a little deeper can show that even the “worst” things about HSAs can still bring advantages for accountholders.
1Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.