There is not a worse time in life than when unexpected medical expenses make their appearance. Depending on where you and your family are at financially, the effects can be devastating and leave you wondering how you will be able to pay off the stack of medical bills that seem to be piling up. There is a solution that can help if you are ever caught in this unexpected storm; a health savings account. Here we will give you all you need to know before making the decision if a health savings account is the right move for you.
What is a health savings account?
A health savings account is a personal savings account that has tax advantages and helps cover costs your health insurance may not. Essentially how it works is you elect to take a certain amount of money out of your paycheck each month that is then deposited to the account. You can then use the funds in that account to pay for any medical expenses or copays that are not covered by your health insurance. A health savings account is typically offered by your employer but if it isn’t you can also apply for one independently.
How does it work?
When you open a health savings account, you are able to make tax-free deposits into the account throughout the year. This money can then be used to cover medical expenses of your own or those of your family members, whether they are covered by your health insurance plan or not. Typically a health savings account is paired with high deductible health insurance. It is great to have a high deductible health insurance policy for in those rare cases you have some major medical expenses come up; but it can be hard to meet those high deductibles when you are not having any major problems. This is when the health savings account comes in handy, it can help you cover the expenses that your health insurance won’t pay because you haven’t met the deducible. If you don’t use the funds in your account it collects interest, just like any other savings account, and continues to grow and be available for when you do need it.
What are the tax benefits?
With a health savings account you are able to lower your federal income taxes because the money you have deposited into your account through the year is pre-taxed.
Another added tax advantage to a health savings account is that when you reach the age of 65, there is no penalty for withdrawing the money to use on non-medical related expenses. You can no longer contribute to your health savings account once you have enrolled in Medicare, but you can still access the funds previously deposited.
Medical expenses can get overwhelming and are often unexpected. By having a safety net like a health savings account you can sleep better at night knowing that you have money set aside just in case something comes up. If it goes unused, at the very least you have another savings account growing each month.