Healthcare is a massive expense for working Americans, as well as retirees, so it pays to do what you can to make it as affordable as possible. But new data from HSA Bank reveals that 42% of Americans may be losing out on an opportunity to save money by not knowing one key thing: whether their health insurance plans are eligible for a health savings account (HSA).

How do HSAs work?

An HSA is a hybrid savings and investing account that lets you set aside money for healthcare costs in a tax-advantaged fashion. The money you put into an HSA goes in tax-free, similar to how traditional 401(k) and IRA contributions are made with tax-free dollars.

Furthermore, any funds you don't use immediately for medical care can be invested and grown into a larger sum, but those gains won't be taxed. Your HSA withdrawals also won't be taxed, provided they're used for qualified medical expenses.

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Consider an HSA for near-term and long-term needs

An HSA is a great place to stash money you might need for near-term medical bills. But the best way to capitalize on an HSA is to treat it as a separate retirement savings account of sorts.

Healthcare is a major expense for many seniors, so by allocating money for it well ahead of retirement, you'll have a dedicated means of paying for medical care at a time in your life when money may be tight. Furthermore, once you turn 65, you're allowed to withdraw funds from your HSA for any reason.

In that scenario, those withdrawals will be subject to taxes, but you won't face the penalties you'd otherwise be hit with for taking non-medical withdrawals at an earlier age. And remember, traditional 401(k) and IRA withdrawals are also taxable, so funding an HSA really doesn't put you at a disadvantage, especially if you've already maxed out your retirement plan contributions in a given year.

Is your health plan HSA-friendly?

Clearly, there are benefits to saving in an HSA. There's just one catch: Not everyone is eligible.

If you're not sure whether your health plan is compatible with an HSA, ask. But also, you should know that qualifying plans must meet these criteria:

  • Have a minimum annual deductible of $1,400 for individuals or $2,800 for families
  • Have an annual out-of-pocket maximum of $6,900 for individuals or $13,800 for families

Keep in mind that these rules will change from year to year, and the above thresholds apply to 2020 only.

Assuming you do qualify for an HSA this year, you're limited to an annual contribution of $3,550 as an individual or $7,100 for a family. If you're 55 or older, you get a $1,000 catch-up, similar to the $1,000 catch-up you can make in an IRA.

Know your health plan

The more you understand about your health-insurance plan, the more likely you'll be to find ways to save on medical costs. But saving on medical costs doesn't just mean lowering your prescription copays; it also means lowering your tax burden in the course of paying for healthcare, all while setting yourself up with money to pay for medical expenses during your senior years.

An HSA can help you achieve those goals, so it pays to see whether your health plan renders you eligible for one.