Want to save money on health care? There is just one surefire solution.
The average American spent $400 more on health care and health insurance in 2012 when compared to 2010, a gain of 12.5%. This compares to just a 7% gain in total average spending, meaning that more and more health care costs are taking a bigger bite out of consumers' income.
One thing individuals can do to help save money on health care costs is utilize a Health Savings Account, or HSA. These savings accounts allow individuals with high-deductible health insurance to save money for medical expenses without paying taxes.
What an HSA is
People with health insurance deductibles greater than $1,250 for an individual and $2,500 for families can qualify for an HSA. An individual is then allowed to contribute $3,300 to an HSA tax-free in 2014, and the limit stands at $6,550 for an individual with a family.
In turn, that money is withdrawn before taxes every month into a special savings account and can be used on qualified medical expenses, which the IRS defines as those used for the "diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body."
Those of course include hospital visits, prescription medicines, and other services, but also thing like eyeglasses, insulin, and hearing aids. The complete list is available from the IRS.
Yet not only is the money contributed tax-free, but it also grows tax free and is withdrawn tax free, known as "triple tax savings." This means if you don't use the $2,000 amount saved and it grows to $2,500 after years of interest payments, that $500 doesn't face the capital gains tax like other investments, and you'll never pay a single cent in taxes when it is withdrawn.
All told, an HSA can be an incredibly effective tool to help save on health care expenses that all people face in their lifetimes.
How an HSA works
Those with high-deductible plans can get an HSA through their current insurer if they offer it, or through a bank like Bank of America (NYSE:BAC) or Wells Fargo (NYSE:WFC). The person will then decide how much they want to save each month, and then that money is withdrawn and put into the account.
Like any other bank account, there is an associated debit card that is issued to pay for those eligible health care expenses. Also, the money can be invested into mutual funds provided the balance of the HSA exceeds $1,000, and also investments that pay less interest, but have much lower risk. It should be noted that individuals should ensure they have enough to cover potential unplanned expenses before they invest heavily in funds that may be volatile and stand the chance to lose money.
Individuals should also always review all account disclosures for fee information, interest rates, FDIC coverage, and other information to ensure their HSA is with a trustworthy provider and indeed is what's best for them.
Why you should get an HSA
The principal benefit of the HSA is the tax savings it provides. Consider the example Bank of America provides on its website of a family of four that saves $4,000 over 20 years, spends $2,000 each year, and the account grows at just 2.5%. That family would have saved $23,091 in taxes, and have more than $51,000 in the account at the end of year 20.
Outside of the tax benefits of an HSA, a great benefit too is that unlike Flexible Spending Accounts (FSA) that are owned by your employer, the money in an HSA is yours, it never expires, and can be saved for years and years.
There is no denying the cost of health care is on a troubling path, but using an HSA can help consumers ease the burden through significant tax savings and other crucial benefits.
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Fool contributor Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.