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Health Savings Accounts (HSAs): Advantages & disadvantages

Health savings accounts (HSAs) come with several advantages.

Security. HSA-qualified insurance and the HSA account provide protection against high or unexpected medical bills. All policies also cover preventive care services to help you maintain your health and avoid illness and disease.

Affordability. High-deductible plans may make health insurance more affordable by lowering your health insurance premiums. The savings can be substantial, which can help you fund your HSA account.

Flexibility. HSA funds can pay for current medical expenses, including expenses that insurance may not cover. Funds can also be saved for future needs, such as:

  • Health insurance premiums or medical expenses if no longer working (such as COBRA or when unemployed or retired but not yet on Medicare)

  • Out-of-pocket expenses and premiums (except for Medigap premiums) when covered by Medicare

  • Long-term care expenses and insurance

With her newborn son George, laying next to her, Lara Ibrahim fills out her election ballot from her hospital bed at the Ronald Reagan UCLA Medical Center in Los Angeles on Tuesday, Nov. 8, 2016. Dozens of patients at the hospital were able to vote from their beds thanks to a volunteer program. Ibrahim had planned to vote at her usual polling place but ended up giving birth earlier than expected. (AP Photo/Richard Vogel)
An HSA can cover a number of medical expenses. (Photo: AP Photo/Richard Vogel)

Portability. HSA accounts are completely portable. You can keep and take your account with you even if you:

  • Change jobs or become unemployed

  • Change your medical coverage or marital status

  • Move to another state

Ownership. You own the funds in your account. The funds in the account remain permanently and roll over from year to year, just like an IRA. There are no "use it or lose it" rules for HSAs.

Tax savings. HSAs provide triple tax savings:

  • tax deductions when you contribute

  • tax-free earnings through investment

  • tax-free withdrawals for qualified medical expenses

Disadvantages of health savings accounts

Health savings accounts have some disadvantages.

Change. You must switch to HSA-qualified insurance from traditional insurance. Sometimes this means you must change insurance carriers as well.

Other coverage. You may be ineligible to contribute to an HSA if you or a family member has other insurance coverage that is not HSA-qualified, or has a flexible spending account or health reimbursement account through their employment.

Information. Sometimes it is difficult to get good information on health care prices and quality of services so you can comparison shop for good value in health care. Fortunately, better information is becoming available every day.

Tax filing. You must file an income tax return to take advantage of all the benefits HSAs offer.

There are pros and cons to contributing to an HSA. (Graphic: Hannah Smart/Cashay)
There are pros and cons to contributing to an HSA. (Graphic: Hannah Smart/Cashay)

What is covered?

To be an expense for medical care, the expense has to be primarily for the diagnosis, cure, mitigation, treatment, or prevention or alleviation of a physical or mental defect or illness. Additional information is available from IRS Publications 502 and 969 (available through www.irs.gov). Consult your physician and tax advisor if you have questions.

Dive deeper: Health, dental, and vision insurance: A comprehensive guide

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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