HSAs are not for everybody. They are only for people who have a “high deductible health plan” (HDHP).
When you’re young, prior to age 65 when Medicare starts, other than the HDHP rules, they’re pretty straight forward.
When used to focus on health related expenses they work well. When it comes to savings and retirement – this is when more land mines appear.
Yes, contributions can be deducted from taxes, which is what attracts many people – but remember, tax savings are not the only consideration. Money can be withdrawn anytime for qualified medical expenses. HSAs should not be confused with Flexible Savings Accounts (FSA) which have a use-it-or-lose-it feature. Tax deduction of contributions though may NOT be deductible on some State tax returns, for example, they are not deductible for California taxes.
There is a 20% penalty for withdrawing money for non-qualified expenses or other non-medical reasons. This penalty goes away once you reach age 65.
Not all HSAs are alike. Fees vary. Investment choices vary. Financial institution expertise and administration vary. So they require a bit of homework.
HSAs are best used for those who are healthy and need less care, not for those who need more frequent or specialized care.
HSAs, because of the savings feature, may encourage some to focus more on the savings feature and ignore their own health by not using their health plan because they don’t want to use their HSA money.
Not understanding how medicines should be paid for under high deductible plans may cause other problems.
Finally, there’s a complex interaction between HSAs, Social Security and Medicare.
At anytime, should you pass away, your spouse can inherit your HSA. Can they actually use it though – since their health condition, etc. may not be the same as yours? And as for children as heirs -HSAs are terrible. The HSA becomes fully taxable as income to them the year of your death – period.
HSAs are useful in certain situations, and not so much in others. A careful evaluation should be done if you’re really contemplating putting one in place.
More on HSAs here including the question of saving it or spending it?
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