The HSA (Health Savings Account) is a relatively new vehicle for savings; it was introduced in 2003.What these plans do is create a tax free way to to pay for medical expenses. They work very similarly to an IRA the money you add to one is deductible from your income at tax time and better still if you use the money for qualified medical expenses then it is not taxed when it comes out as well.
What is great about the HSA:
1. Unlike an FSA(Flexible Spending Account) you keep what you don't use.
2. It stays with you. If you change or even lose your job you still have you HSA.
3. If you are retirement age you can use it like an IRA and make non-medical withdrawals and only pay taxes on a regular income (no early withdrawal penalty) if you use it for qualified medical expenses then it's tax free like have a traditional and and IRA in one!
4. In many cases your employer may make a match or contribution to your HSA.
5. Most HSA plans have an investment option, so if you can start young this could be a considerable mount at retirement.
6. Like IRAs you can make catch up contributions once you are 55 or older.
What is not so great about the HSA:
1. To qualify to use one, you can only have a high deductible insurance plan. So the first thousand + or so of expenses has to come out of pocket or out of what's been contributed to the plan.
2. You can't combine and FSA with an HSA.
3. There aren't as many providers for the HSA as there are IRAs and such so the fees tend to be a bit higher.
How much should I contribute to my HSA?:
If possible contribute the maximum the IRS allows. You can check their website to see what those limits are. The limits include employer contributions. For starters, premium for your high deductible plan will cost a good bit less than your low deductible. At the very least contribute the difference in your premium. If you are younger and healthier chances are you will keep it. Pay for as much of your medical expenses as you can without the HSA, especially if you are young. Your future costs will likely be much higher.
Should I choose HSA?:
If you know you are going to have a lot of medical expenses and you don't have the available income to cover the higher deductible then go with a more traditional plan. Otherwise the HSA is the way to go for a more prosperous future and to build wealth slowly!
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