Americans are living longer. That should be good news. However, Americans are also terrible at managing their money, being a bit of a cheapskate wouldn’t hurt most, which is why an individual retirement account (IRA) is such a blessing. However, with medical costs and everything else rising, it is usually a good idea to live frugally. The answer is to invest your money in something. The question is what. Here we explore the pros and cons of a health savings account (HSA).
What is an HSA?
According to the IRS, an HSA is “a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.” Not everyone can set up an HAS, however. To be eligible, you
- Must be covered under a high deductible health plan (HDHP)
- Have no other health coverage, with some exceptions
- Must not be enrolled in Medicare
- Are not a dependent on anyone’s tax return for the previous year
The key term in an HAS is “tax exempt.” This exemption applies to money you put into the account, the interest or income accrued, and withdrawals for qualified medical expenses. By contrast, an IRA goes in and builds up tax-free, but incurs taxes when it is used. You can accumulate quite a bit of change in an HSA over time, and this can be a boon for your golden years.
However, only a few people can actually afford to put money in an HSA. This is because it requires the purchase of an HDHP, with a minimum deductible of $1,300 a year for individuals, and $2,600 for family accounts. The people that can realistically benefit from an HSA are those that never get sick, or who can afford to pay current medical expenses to let the savings account grow to cover future medical expenses. In addition, HSA withdrawals are tax-free as long as it is for qualified medical expenses before the age of 65 or Medicare eligibility. Otherwise, the withdrawal is subject to income tax and a 20% penalty.’
An HSA may seem like a good way to stretch your IRA dollar, but it has serious limitations. Before committing to an HAS, consult a qualified tax professional to find out if it is a good investment option for you.