Should This Big Drawback Mean You Shouldn't Get an HSA?

It doesn't have to be a deal-breaker.

Keeping money in a savings account is a wise thing to do -- but it won't offer you any tax benefits. On the other hand, there are certain accounts that do result in a tax break. If you put money into a traditional IRA or 401(k) plan, for example, the IRS won't tax you on your contributions provided you stick to the maximum allowable limit set each year.

HSAs, or health savings accounts, work similarly. The money you put into an HSA goes in on a pre-tax basis so that if you contribute $2,000, the IRS won't tax you on that $2,000 of earnings. And like IRAs and 401(k)s, HSAs let you invest money you aren't spending on healthcare expenses right away so you can grow it into a larger sum over time.

HSA withdrawals are also tax-free as long as they're used to cover qualified medical spending. In fact, HSAs are really the only account to offer three distinct tax breaks -- tax-free contributions, investment gains, and withdrawals.

There is, however, one drawback of having an HSA. To qualify for one, you must be enrolled in a high-deductible health insurance plan, the definition of which changes every year.

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In 2023, you'll be eligible for an HSA if you have an individual deductible of $1,500 or more. If you have family coverage, you'll qualify with a deductible of $3,000.

At first, the idea of having to pay a deductible that large may seem unappealing. And so if you're able to choose between a health insurance plan with a higher deductible versus a lower one, you may be tempted to opt for the latter -- even if it means giving up the chance to fund an HSA. But while a higher deductible might seem like a bad thing, here's why it's really not.

You might enjoy a different kind of savings

Forking over a larger amount of money for a deductible may seem like a burden. But one thing you should realize is that health insurance plans with higher deductibles tend to come with lower premiums. So what you pay in one regard, you might save in another. In fact, you might even come out ahead financially with a higher deductible and lower premium costs versus the opposite setup.

You may not have to pay your entire deductible

Let's say you have health insurance coverage for yourself only, and you keep yourself in good shape and rarely get sick. In that case, you may not end up having to fork over the money for your entire deductible.

Remember, an HSA requires you to have a health insurance plan that comes with a certain minimum deductible. It doesn't require you to pay that deductible if you don't end up incurring enough healthcare expenses to do so.

Don't let a high deductible scare you off

You may not love the idea of facing a higher deductible if you or a family member ends up needing a lot of medical care during the year. But you shouldn't let that stop you from signing up for a high-deductible health insurance plan that's HSA-compatible. There really isn't another savings plan that offers the same level of tax benefits as an HSA. So it pays to do what you can to render yourself eligible for one.