Healthcare Costs Are Up 4.1% From Last Year -- but This Account Can Help You Pay for It

It's important to set aside money for healthcare, since you never know when you might need it.

There are certain expenses in life that are absolutely essential -- things like housing, transportation costs, food, and healthcare. But the cost of the latter has risen a lot through the years, leaving many people struggling to keep up.

As of December of 2022, the cost of healthcare was up 4.1% on an annual basis, according to the Bureau of Labor Statistics. And that number has the potential to keep climbing -- even if inflation levels cool this year.

That's why it's so important to make sure you have money set aside for medical expenses. And one account will allow you to save for healthcare in a tax-advantaged manner -- if you qualify for it.

Are you eligible for a health savings account?

You could simply pad your regular savings account to cover upcoming healthcare needs. But you won't snag any tax breaks in the process. On the other hand, if you fund a health savings account (HSA), you can save for healthcare and enjoy some neat tax breaks along the way.

The beauty of HSAs is that they offer three types of tax benefit. First, your contributions get to go in tax-free. Next, you get to invest money you don't need right away, and any gains in your HSA will be yours to enjoy tax-free. Finally, the withdrawals you take will be tax-free, as long as you use that money for qualified medical bills, like copays for prescriptions, diagnostic tests, and doctor visits.

Furthermore, HSAs are extremely flexible. They don't require you to spend down your balance year after year like flexible spending accounts do (which, despite their name, are really anything but flexible). You could fund an HSA at age 25 and carry your money all the way into retirement if you want to.

The only drawback of HSAs, though, is that your health insurance plan needs to conform to certain rules for you to qualify. In 2023, your plan needs to meet the following criteria:

• Have a minimum $1,500 deductible for individual coverage or a $3,000 deductible for family coverage
• Have an out-of-pocket maximum of $7,500 for individual coverage or $15,000 for family coverage

If your health insurance plan has a family deductible of $3,000, but an out-of-pocket maximum of $18,000, you won't be able to participate in an HSA.

Don't leave yourself vulnerable

You never know when you or someone in your family might get hurt or sick, resulting in hundreds or even thousands of dollars in medical bills in a short period of time. Having money set aside for healthcare costs could spare you the stress of racking up debt due to medical expenses.

Of course, we don't know how much more expensive healthcare will get in 2023 compared to 2022. But it's important to recognize that even if inflation levels generally cool off this year, the cost of healthcare might still rise because that's how it's been trending for a long time. So the more of an effort you make to save for it in advance, the better off you'll be.