67% of Americans Are Stressed About Medical Bills. This Account Could Make Them Easier to Manage

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KEY POINTS

  • Medical expenses are often unavoidable.
  • There's one account you should look at funding if your health insurance plan is compatible with it.
  • A health savings account (HSA) can be used to set aside pre-tax dollars for medical care, but you must have a high-deductible health insurance plan to open one.

It pays to open one if you qualify.

Healthcare is one of those unavoidable expenses that can be a burden at any stage of life. And unfortunately, medical bills have the potential to drive consumers into debt -- and even into bankruptcy.

Thankfully, there have been recent changes to credit reporting that can help protect consumers with medical debt from having their scores take a massive hit. But even so, owing money for healthcare can be a stressful situation.

It's not surprising, then, to learn that 67% of Americans are worried about medical bills, according to the latest BMO Real Financial Progress Index. But there's one specific account it pays to look at that can help you set money aside for healthcare costs.

Does your health insurance plan work with an HSA?

If you have a high-deductible health insurance plan -- defined as an individual deductible of $1,500 or more in 2023 and a family deductible of $3,000 or more -- then you may be eligible to contribute money to a health savings account, or HSA. And if so, it makes sense to jump on that opportunity.

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The reason? HSAs come loaded with tax breaks that make it easier to save money for healthcare purposes.

The money you put into an HSA is tax-free, the same way you don't pay taxes on money you put into a traditional IRA account or 401(k) plan. Then, you can invest any money in your HSA that you don't need to use right away for healthcare spending.

As that money grows, you won't pay taxes on your investment gains (whereas with a regular brokerage account, you do pay taxes on gains like that). And then, HSA withdrawals are tax-free as long as that money is used for qualified medical bills. Those, however, run the gamut from copays at doctors' offices to medications to dental and vision services.

Another option to look at

If your health insurance plan is not compatible with an HSA, you can always put money into a flexible spending account, or FSA. But these plans aren't quite as helpful as HSAs.

While you get to enjoy tax-free contributions with an FSA, and tax-free withdrawals for healthcare expenses, you can't invest the money you don't need right away. In fact, with an FSA, you're forced to spend down your account balance every year, and you risk forfeiting any funds that are left over.

With an HSA, your money never expires. You can carry it forward for decades and use it in retirement if you want.

In fact, one of the best ways to benefit from an HSA is to specifically not deplete your plan balance every year if you can help it. That way, you can leave money invested so it can grow into a larger sum over time. And then, come retirement, you might have a dedicated means of covering healthcare costs at a time when they're likely to rise.

No matter which type of plan you qualify for, though, it's a good idea to set aside funds for healthcare purposes. Doing so could prevent you from losing sleep over the idea of costly medical bills -- which, incidentally, is not exactly a good thing for your health.

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