One of the scariest things about self-employment is health insurance.
It’s confusing. It’s expensive. And, well, your health is at stake.
Having great health insurance, especially when it is paid for by an employer, is one of the best perks of working for someone else.
But companies are starting to shift the financial responsibility of health care onto employees. This means opting for high-deductible health plans.
If you are young and healthy, you may actually save on health insurance by paying lower premiums. But if you need more than routine care, out-of-pocket expenses can add up.
Although high-deductible health plans have lower premiums, you must pay a significant amount of money out-of-pocket before the insurance company starts paying.
But guess what? There is a triple tax-advantaged secret weapon than can help—health savings accounts!
What is a Health Savings Account (HSA)?
Health savings accounts (HSAs) lighten the financial burden of high-deductible health insurance plans. These accounts allow you to pay for health care expenses and save on future costs.
This year’s IRS definition of a high-deductible insurance plan has the following deductibles:
- $1,300 for an individual
- $2,600 for a family
Here are the contribution limits for 2016:
- $3,350 for an individual
- $6,750 for a family
- $1,000 extra if you are older than 55
Health Savings Accounts Offer Triple Tax Advantages
- Your contributions are both pre-tax* and tax-deductible.
- Your earnings grow tax-free.
- Your withdrawals for qualified medical expenses are tax-free. At 65, withdrawals for non-medical expenses are taxed at your current rate, like an IRA.
*Contributions are only pre-tax if they are made by an employer through a payroll deduction.
How to Qualify for a Health Savings Account
- You must be enrolled in a high-deductible health plan.
- You can’t be enrolled in a Medicare or other health insurance plan.
- You can’t be a dependent on someone else’s tax return
Other Health Savings Account Perks
- Flexibility You can roll over health savings account money every year. Your health savings account isn’t tied to your employer. You can take it with you when you change jobs. Also, you can shop around for the best options.
- Growth opportunity Many accounts offer investment options like mutual funds or stocks. Can you afford to pay health expenses out-of-pocket? If so, you can use a health savings account to save long-term for health care expenses in retirement.
- No income restrictions It doesn’t matter how small or large your income is. Everyone with a high-deductible health plan is eligible.
Downsides of Health Savings Accounts
- Fees Many health savings accounts charge a monthly maintenance fee or transaction fees. These expenses can add up fast, eating away at your savings and growth. Ask about all fees upfront.
- Staying organized Do you struggle with keeping track of receipts? You need to prove health savings account withdrawals were only used for qualified health expenses. There is a full list of what is covered here.
- The cost of high-deductible health plans High-deductible health plans don’t make sense for everyone. These plans can save money on premiums if you are healthy. But if you need more than routine care you will be responsible for significant out-of-pocket expenses until the deductible is met. Unfortunately, this leads some people to avoid necessary care.
How To Find the Right Health Savings Account For You
Once you have enrolled in a high-deductible health plan, you have several options.
Here is where to begin your health savings account research:
- Ask your health insurance provider if they have a preferred provider.
- Ask your company’s human resources department for recommendations.
- Research options through local banks and credit unions.
- Shop online through www.hsarates.com or www.hsasearch.com.
Here are some questions to consider when deciding on an account:
- How soon will you need the money? Are you planning to spend the money quickly? Or are you more interested in long-term growth? Depending on your answer, you should compare each plan’s interest rates and investment options.
- What are the fees? Be sure to review all fees associated with the account. These can include setup fees, monthly or annual fees, minimum balances, overdraft, etc.
- How is the customer service and company’s software? Do you prefer in-person help, talking over the phone, navigating your account online, or checking balances on a mobile app? It’s worth reviewing the company’s options to be sure they are able to meet your needs.
If you are enrolled in a high-deductible health plan, it is worthwhile to pair it with a health savings account. Health savings accounts can help ease the burden of out-of-pocket expenses. These accounts offer triple tax advantages. Plus, they can help save for healthcare expenses for retirement.
Readers: Have you taken advantage of a health savings account? Do you have a favorite provider?