Advantages and Disadvantages of a Health Savings Account (HSA)

Health savings accounts are becoming a viable alternative as many families try to put money away for future medical expenses. A health savings account is a tax advantaged plan that is designed to help account holders save money for future medical expenses. Here are the main advantages and disadvantages of an HSA.

Advantages of Health Savings Accounts

Your Account Stays with You

The biggest advantage I can see with an HSA is that the money you contribute and accumulate is your money for your medical expenses forever. No matter what, you get to take your account with you wherever you go.  It is not tied to a single job. That is pretty awesome in my opinion.

No Federal Income Tax on Contributions

Another advantage of health savings accounts is that the contributions are not taxed at the federal level regardless of your income. There is no income cap so anyone can benefit from the tax savings of a health savings account.

Earnings Grow Tax Free

Earnings in your HSA are allowed to grow income tax free as well. You can invest the money you contribute to an HSA, and all of the contributions and returns can be used to pay for qualified medical expenses. This gives account holders the ability to accumulate even more money for their healthcare needs.

Medical Expenses Are Paid Tax Free

Withdrawals are free from federal taxes as long as they are applied to qualified medical expenses. Qualified medical expenses are eligible expenses like prescription medication, dental trips, and doctor's visits. Most forms of medical care will qualify and will often cover the spouse and dependents as well.

Disadvantages of Health Savings Accounts

Penalties

There is a substantial 20% penalty for anyone under the age of 65 that uses the money in an HSA for anything other than qualified medical expenses. Income taxes have to be paid on any withdrawals that are not for qualified medical expenses.

Account Value Can Decline

Since most health savings accounts are invested in assets like stocks and bonds, the balances can fluctuate. This means that account holders could see account values decline during bad financial markets. If you rather not take that risk, many people keep their HSA contributions in regular savings accounts and don't make or lose much extra money.

Eligibility

You can only have an HSA if you are covered by a high deductible medical plan and are not covered by any other plan as well. Anyone age 65 and older that is already enrolled in Medicare is not eligible either. These provisions prevent lots of people from being able to take advantage of this type of plan.

My Personal Take on an HSA

My company offers us two medical plans. One costs us about $1000 a year and is a basic plan with $25 co-pays and a $750 annual deductible with 80% covered after that until I pay a maximum of $4000 out of pocket.

The other would cost me $50 a year and is a high deductible plan that comes with an HSA. It covers nothing until I hit $2750 and then covers 80% until I pay out a total of $5750 in a single year.

The $950 difference a year in premiums wasn't enough to entice me into using the HSA. But my case is unusual since most regular insurance plans cost way more than mine, so HSA's usually end up being a fantastic idea.

What do you think of HSA's?

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Edwin C

Edwin is a marketer, social media influencer and head writer here at Money In The 20’s. He manages a large network of high quality finance blogs and social media accounts.