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The Advantages of HSAs


Why do people open up Health Savings Accounts in conjunction with high-deductible insurance plans? Well, here are some of the compelling reasons why younger, healthier employees decide to have HSAs.

#1: Tax-deductible contributions. These accounts are funded with pre-tax income. Your annual contribution limit to an HSA depends on your age and the type of insurance plan you have in conjunction with the account. For 2015, limits are set at $3,350 (individual plan) and $6,650 (family plan). If you are older than 55, those limits are nudged $1,000 higher. (1,2)

#2: Tax-free growth. Under federal law, the money in an HSA grows untaxed. Some HSAs even have investment options. (3)

#3: Tax-free withdrawals (as long as withdrawals pay for health care costs). Distributions out of an HSA are tax-free as long as they are used to pay qualified health care expenses. This is the federal tax treatment, and most states treat HSA distributions in like-fashion. (3)

Add it up: An HSA allows you to avoid taxes as you pay for health care. Additionally, these accounts have other merits.

You own your HSA. If you leave the company you work for, your HSA goes with you – your dollars aren’t lost. (4)

Do HSAs have underpublicized societal benefits? Since HSAs impel people to spend their own dollars on health care, the theory goes that they spur their owners toward staying healthy and getting the best medical care for their money.

Additionally, the HSA is sometimes called the “stealth IRA.” If points 1-3 mentioned above aren’t wonderful enough, consider this: after age 65, you may use distributions out of your HSA for any purpose, although you will pay regular income tax on distributions that aren’t used to fund medical expenses. (If you use funds from your HSA for non-medical expenses before age 65, the federal government will hit you with a 20% withdrawal penalty in addition to income tax on the withdrawn