The beginner’s guide to HSA accounts

The average American spent $10,345 on health care in 2016 and those costs are expected to continue rising. If you are seeking a convenient way to save for and pay for those pricey bills, an HSA account may be the solution.

Wondering what the heck an HSA account is? We’ve got answers.

Unlike an FSA (Flexible Spending Account), an HSA (Health Savings Account) does not have to be established by an employer. You can start one for yourself and build up your savings through pre-tax payroll deductions, employer contributions or individual contributions.

With an HSA account, you can force yourself to save for unexpected (or expected) medical expenses, rather than coming up short when a big bill from the doctor’s office arrives. Plus, you can make pre-tax contributions from your paycheck, which means you’ll pay less in taxes!

Before you run out and try to start up an HSA though, you should know some important details about them. Learn the basics of health savings accounts to determine whether one would be a good fit for your financial needs.

Criteria

Not everyone can start a health savings account. To qualify, you must be enrolled in a health care plan with a high deductible, as defined by the government. The minimum annual deductible for 2017 is $1,300 for an individual and $2,600 for a family. In addition, you may not have other health coverage (other than your high-deductible plan), you cannot be enrolled in Medicare and you may not be claimed as a dependent on someone else’s return.

Qualifying Expenses

If an expense would qualify for the medical and dental expenses deduction on your tax returns, it likely qualifies as an eligible HSA expense, as well. Everything from acupuncture, an ambulance ride and your annual physical to therapy, x-rays and wheelchairs are qualifying expenses.

Contribution Limits

You can contribute to your HSA account  any time during the calendar year, even up to April 15 of following year. You can pay in lump-sum contributions or have a set amount come out of every paycheck. For 2017, you can contribute up to $3,400 for an individual plan or up to $6,750 if you have coverage for your whole family.

Pros

There are numerous benefits to an HSA:

• Anyone can contribute to your account, from you to your employer to your Aunt Mildred.
• Payroll contributions are pre-tax and you can deduct other contributions from your tax return. This means you’ll pay less in taxes!
• Withdrawals and earnings are tax-free.
• Funds left in your account at the end of one year roll over for you to use in the next.

Cons

Aside from requiring you to have a high-deductible insurance plan, HSAs have a handful of other potential drawbacks, as well. For instance:

• You must keep receipts and records of expenses for which you make withdrawals
• You will have to pay taxes and a 20 percent penalty if you withdraw funds for non-qualified expenses before the age of 65. In other words, you must actually use the money for its intended purpose: to cover medical costs.
• Some HSAs charge monthly or per-transaction fees.

How to Get Started

Provided you meet the prerequisites and the benefits suit your needs, you can start your own health savings account at any time. Shop around with institutions that offer HSA plans, such as banks, credit unions and insurance companies. Consider factors such as convenience, fees and minimum balance requirements.

If you find the right plan, your HSA can help ease the financial burden of health costs, whether you wind up with a large medical bill or little expenses throughout the year.