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Protect Your Budget With a Health Savings Account

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Health care costs have risen dramatically over the last decade, with health insurance premiums alone rising 54 percent. A health savings account (HSA) may help keep health care expenses from taking over your budget.

Big savings on medical costs

These accounts, which you may hold through an employer or on your own, are tax-free. You contribute pre-tax dollars, which can grow tax-free as long as you hold the account. Withdrawals for medical expenses are tax-free as well.

The accounts can provide huge savings over time, says Paul Hackleman, a health policy analyst with the International Foundation of Employee Benefits. "An HSA allows you to set aside money to pay for health care in a thoughtful, long-term way," he says. "It's like a health IRA: During your working years you set aside assets that you can use after you retire -- in this case for health expenses that you'd otherwise pay out of pocket." You can spend the balance for current medical costs or let it grow into retirement.

Consumers are taking note of the savings: In January 2011 nearly 11.5 million people were covered by HSAs.

Are you eligible?

Not everyone qualifies. For starters you must be enrolled in a health plan that has a high deductible. In 2013 the deductible must be at least $1,250 for an individual or $2,500 for a family. If you are on Medicare, have other health coverage or can be claimed as a dependent on someone else's taxes, you are not eligible to open an HSA. You still can make withdrawals from one, however.

Eligible individuals can contribute up to $3,250 to an HSA in 2013; families can contribute up to $6,450. However, your individual limit may be lower based on the type of health coverage you have, your age, and the time of year you open the account. Check with your human resources department or HSA provider to ensure that you follow the rules.

Hackleman says there's one more issue to consider: whether an HSA's savings actually add up for you. He says young, healthy people without chronic health problems tend to benefit the most from HSAs because they likely won't need to withdraw much, leaving the bulk of their HSA assets to benefit from decades of potential compound growth.

Some older people may benefit from opening HSAs -- but only if a low-deductible health plan isn't an option. "If you're using the health care system year in and year out, you're probably better off having a low-deductible plan rather than a high-deductible plan with an HSA," Hackelman says.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


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