Why You Need an HSA

Find out how a health savings account can help you save money.

A health savings account might enable you to offset costly medical expenses at tax time. If you qualify, an HSA provides you with a triple tax break: Your contributions are tax-free, they grow tax-deferred and you can use them at any time to pay for medical expenses tax-free.

Businesses and individuals use HSAs to help pay for the steep costs of healthcare. Many employers contribute to employees’ HSA accounts — and because this type of spending account doesn’t expire, you can keep it through retirement and use it as an extra savings fund. Learn what an HSA is and if it benefits your financial situation.

Learn what an HSA is and how it can benefit your financial situation so that you can find ways to survive rising healthcare costs.

What Is an HSA?

An HSA is a tax-free savings account designed to help qualified individuals offset healthcare costs. HSA enrollees must be covered by insurance plans with high deductibles. As a cost-saving measure, many businesses are encouraging employees to enroll in high-deductible plans and pair them with HSAs.

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How Does an HSA Work?

You make pretax contributions to an employer-sponsored HSA and your contributions are tax-deductible if you have an individual HSA. You can make tax-free withdrawals from your HSA for medical expenses at any time.

Annual HSA contribution limits for 2017 are $3,400 for individuals and $6,750 for families. If you’re 55 or older you can make an extra $1,000 as a “catch-up” contribution each year. You can contribute to an HSA until Tax Day.

See: 10 Best and Worst States for Health Insurance Costs

HSA Account Rules and Eligibility

Although you don’t need IRS authorization to establish an HSA, there are several eligibility requirements and governing rules you must follow. You must be enrolled in a high-deductible health plan, which for 2017 translates to plan with a $1,300 deductible for individuals and $2,600 for families. Because not all high-deductible plans are eligible for HSAs, it’s important to choose one that is.

To be eligible for an HSA, no other taxpayer can claim you as a dependent on his returns. In addition, you cannot be enrolled in Medicare or have any supplemental health coverage.

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How to Establish an HSA

Qualifying trustees must establish HSAs. Examples of these might include insurance companies, banks and IRS-approved individuals.

Many businesses work with a designated HSA administrator but you can choose any qualified trustee to open and manage your account. It often pays to go with your employer’s administrator, however, because otherwise you might miss out on valuable employer contributions and experience longer claims processing times, according to Kiplinger.

If you decide to enroll in an HSA on your own, check HSASearch.com to find a plan. The site provides advanced search functions that enable you to compare more than 350 HSA administrators.

Learn: 21 Hacks to Reduce Your Healthcare Costs This Year

HSA Pros and Cons

To better decide whether an HSA is right for your financial strategy, understand the advantages and disadvantages of this type of savings account.

HSA Pros

HSAs come with a wide variety of attractive benefits. Decide if they are tempting enough for you to enroll in a plan.

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  • You can withdraw funds tax-free to pay for healthcare, your money grows tax-deferred until you use it and you don’t pay taxes on the money you contribute.
  • You have no deadline for eligible withdrawals and you keep your tax-deferred contributions until you use them.
  • Most insurers have a streamlined system for easy record keeping and medical billing.
  • If you change jobs, there is no complicated HSA rollover process.
  • An HSA can double as a supplementary retirement account.
  • Many employers contribute to their employees’ plans.
  • All out-of-pocket medical expenses qualify, including co-pays.

HSA Cons

HSAs have a few drawbacks, too. See if any of these is a deal breaker for you.

  • Withdrawals for non-medical purposes are subject to a 20 percent penalty plus taxes.
  • HSA administrators and trustees charge maintenance fees.
  • Your contributions might not cover all your medical expenses.

More: 18 Medical Expenses You Can Deduct From Your Taxes


If you have a high-deductible insurance plan and expect considerable medical expenses, an HSA could be a good choice for you.

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About the Author

Andrew Lisa

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street’s investment community in New York City.

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Why You Need an HSA
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