If you are worried about rising medical costs and the skyrocketing premiums on health policies, you should consider opening a health savings account (HSA). These accounts not only offer you a great way of lowering your medical expenses, they also act as a tax free deposit, which you can tap into when you retire.
exHSAs are meant to work with a high deductible policy, which is a kind of health policy where you pay a larger out of pocket amount before the insurance coverage kicks in. The deductible in your policy should be at least $1,150 for an individual and $2,300 for a family to be able to open a health savings account.
The most important advantage of an HSA is that you save tax on it. You can make deposits of up to $3,000 a year if you have an individual account, up to $5,950 if you have a family account, and up to $1,000 if you are making catch up payments. Your account balance will roll over every year so if you don’t make any medical expense in one particular year, you still get the tax advantage on your savings and you can use the money whenever the need arises.
For most people, by the time they retire, the HSA would have a large sum. And after you turn 65, all withdrawal restrictions are removed and you can use the money for a purpose other than medical expenses as well. Before 65, you can only withdraw from an HSA to pay for medical expenses, and if you make a withdrawal for some other reason, you would have to pay a 10% penalty and tax on the withdrawn amount.
You should also remember that an HSA can only be used to make a “qualified medical expense”. So even though you can use this account to pay for over the counter medication or for dental expenses, you cannot make discretionary purchases that have nothing to do with illness prevention or cure. If you are making a dental expense for purely cosmetic reasons, you can’t use an HSA for that.
Another advantage of an HSA is that if you have lost your employment, you can use this account to pay for your health insurance premiums. This is an immense relief because you would be able to afford insurance despite losing your job and once you move to another job, you can start funding the account again.