Many of us are familiar with flexible spending accounts, or FSAs. But how much do you know about health savings accounts, or HSAs? Though they're not quite as common as FSAs (because there are certain requirements to participate that don't apply to FSAs), HSA enrollment can pay off in a very big way.
How HSAs work
An HSA is a hybrid savings and investment account that's earmarked for a specific purpose: medical care. When you contribute to an HSA, you have the option to withdraw funds that same year to pay for medical expenses or invest your money and let it grow so that you have extra funds to cover medical costs in the future.
To participate in an HSA, you must be enrolled in a high-deductible health insurance plan, which is currently defined as a $1,350 deductible for single coverage or $2,700 for family coverage. Annual HSA contribution limits can change from year to year, but for 2019, you can put in up to $3,500 as an individual saver or up to $7,000 if you have family coverage. Furthermore, if you're 55 or older, you can put in $1,000 above the existing limit you qualify for.
Should you save in an HSA? If you're eligible, it pays to for the following reasons.
1. You'll have one less expense to stress about in retirement
Aside from housing, healthcare is the typical senior's greatest ongoing expense. And recent projections from Fidelity put the total cost of healthcare in retirement at $285,000 for a 65-year-old couple retiring this year. Granted, this is only one estimate, and there are different variables that will ultimately dictate the cost of healthcare for you, but either way, you should go into retirement expecting it to be substantial.
The benefit of an HSA is that you'll have funds set aside specifically for healthcare, which will give you one less thing to worry about once you stop working and move over to a fixed income.
2. You'll lower your taxes today
Both FSA and HSA contributions are made with pre-tax dollars. As such, the amount you put in each year is income the IRS can't tax you on, thereby saving you some money upfront. Not only that, but the money you invest in your HSA grows tax-free while it's in your account, and if you take withdrawals for qualified medical expenses, you won't pay taxes on the funds you remove, either.
3. You might snag free money
You may have heard of employers matching worker contributions to 401(k) plans. Well, along these lines, employers are allowed to put money into HSAs on their workers' behalf. If yours is willing to offer this benefit, it's a great way to score some free cash to cover your healthcare needs.
4. You'll have less of a reason to neglect your health
More than half of Americans routinely delay medical treatment because of the costs involved. If you get into the habit of funding an HSA, you'll have a source of money to tap the next time a large healthcare bill lands in your lap. The result? You may be less likely to neglect the issue at hand and compromise your health in the process.
There are plenty of good reasons to contribute to an HSA, so if you're eligible to participate in one, it pays to sign up. Though HSAs aren't perfect, they offer a solid opportunity to save for expenses that are, in many cases, downright unavoidable.