Pros and Cons of a Health Savings Account
With the new year approaching, for many businesses now is the time to select your insurance coverage, but is a health savings account (HSA) the best route? Here are a few of the pros and cons to health savings accounts.
HSAs are tax-advantaged - Withdrawals for qualified expenses aren't taxed. Also, your contributions to your HSA are pre-tax; you'll be able to contribute more money because federal tax isn't deducted before it is deposited into the account (although some states might require state tax). Furthermore, interest on your savings isn't subject to federal tax.
You can make deductions for after-tax contributions - You can make deductions from your gross income on contributions made after-tax, reducing your overall tax obligation.
Funds roll over - Unlike Flex Savings Plans in which the balance must be used before the end of the year, unused HSA funds continue to accrue, and often there is no ceiling.
Penalties and taxes for non-approved expense withdrawals - If you use your funds for non-approved expenses, you'll have to pay taxes plus a penalty of 20 percent if you are younger than 65. If you are older than 65, you'll only have to pay the tax.
There are fees to consider - These fees can include monthly maintenance fees, as well as fees for failing to maintain a certain dollar amount in your account.
HSAs must be used in tandem with a High-Deductible Health Plan - High-Deductible Health Plans (HDHPs) are low-premium, high-deductible plans. Even if you have funds for your qualified issue in your HSA, it might be problematic coming up with the money for the deductible.
It isn't always possible to predict the extent of your health care needs as you age. Weigh the advantages and disadvantages very carefully.
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