The hype about HSAs

A health savings account helps you pay for medical-related expenses while allowing you to save money for the future See if it's right for you.

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THE BACKGROUND:

When I first made the decision to enroll in the high-deductible health plan (HDHP) at work, it felt a little like rolling the dice. What if I had an accident? Got really sick? Had a ton of doctors’ bills to pay out of my own pocket? Was I jinxing myself for thinking that, at age 28, I was young and healthy enough to make it through an entire year with little more than a routine checkup? What won me over was what came along with it: a health savings account. The Fidelity Viewpoints® article "Three healthy habits for Health Savings Accounts" explains what they are, how to use them, and why you don’t have to dread that trip to the doc’s.

THE BREAKDOWN:

What’s a health savings account?

A health savings account, or HSA for short, is a tax-advantaged savings account. You can open one if you’re enrolled in your employer’s HDHP and meet the eligibility requirements, and you can use it to cover out-of-pocket qualified medical expenses (think prescriptions, co-pays and ER visits).

What are the benefits?

  • Triple tax advantages.
    Your contributions, any earnings, and distributions (translation: the money you take out) are tax free for federal tax purposes1 when used to pay for qualified medical expenses. Sounds good so far, right?
  • You can decide when and how to use the money.
    If you’re hit with a bunch of medical bills, you can use it to pay for those. Or you can let your money grow tax free so you can pay for qualified medical expenses down the road.
  • If you don’t use it, you don’t lose it.
    The balance remains in your account year after year, and stays with you—even if you leave your job.

How much can I contribute?

The 2017 IRS max annual contribution limit is $3,400 if you’re enrolled in single coverage or $6,750 if you’re enrolled in family coverage under an HDHP.

Any tips I should keep in mind?

1. Prepare for the worst-case scenario.
Chances are, you won’t end up in the ER for a broken leg this year. But you can’t just cross your fingers and hope for the best, either. To make sure you’re prepared, Fidelity suggests having enough money on hand to cover "worst-case" medical expenses for a year. Because a traditional health plan’s premium tends to be higher, you could consider taking the difference in cost between that premium and your HDHP premium and contributing the difference to your HSA.

2. Take advantage of that employer contribution.
Many employers who offer HDHPs will also offer a contribution into a health savings account—typically deposited when you first enroll and then annually after that. Combined with your own contributions, this money could add up over time.

3. Save for the future.
Brace yourself for these numbers: A 65-year-old couple retiring in 2016 was estimated to need $260,000 to cover medical expenses throughout retirement.2  Yikes. Here’s the good news: Remember the triple tax advantages we just talked about? Your money can grow tax free, making your HSA a smart savings vehicle for future qualified medical expenses in retirement.1 It’s one of the reasons Fidelity recommends contributing up to the max to your HSA.

THE BOTTOM LINE:

HSAs offer a bunch of benefits that can help you cover short-term and long-term medical costs. As for me? So far, so healthy. And it’s nice to know I can say the same thing about my HSA balance, too.

Topics:
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1. Tax advantages are with respect to federal taxation only. Most states follow federal tax law.
2. 2016 Fidelity analysis performed by its Benefits Consulting group. Estimate based on a hypothetical couple retiring in 2016, at 65 years old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees but may be more or less depending on actual health status, area of residence, and longevity. The Fidelity Retiree Health Care Costs Estimate assumes that individuals do not have employer-provided retiree health care coverage but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies are based on research and analysis by Fidelity’s Benefits Consulting group and data from the Society of Actuaries, 2014.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Fidelity does not provide legal or tax advice, and the information provided above is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific legal or tax situation.
The information provided is general in nature and is not intended, nor should it be construed as, legal or tax advice. Since the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult a tax adviser before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS Web site at www.irs.gov. You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses (including Health Coverage Tax Credit), online or you can call the IRS to request a copy of each at 800-829-3676.
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