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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

Considering a Health Savings Account: Here are the Pros & Cons

Considering a Health Savings Account: Here are the Pros & Cons

With a health savings account (HSA), anyone that has a high deductible health plan that qualifies can use pre-tax dollars for approved medical expenses. The money is kept using an eligible HSA trustee like a bank or credit union, which you can use to offset eligible costs.

Principles of Health Savings Account (HSA)

Every plan does not qualify as a high deductible health plan, making it essential to consult your employer if you are confused. While many employers have an HSA trustee, you can choose your own even if they have. Fees differ across various trustees with varying investment options and interest rates. The services also vary as some can transfer funds between savings or checking accounts and the HSA.

The HSA contribution is pegged at $3,600 for 2021 for singles and double the amount for families. In addition, workers who are 55 years old when the tax year ends can pay an extra $1000.

If your employer deducted these contributions from your paycheck and transferred them to a trustee, such funds are not taxed, which brings down your annual income by the amount deferred. This means that you pay a reduced fee to the IRS while you retain more money. No interests that you accumulate on the cash present in this account will be taxes. When your balance grows to a particular stage, many trustees make it possible to invest in stocks, mutual funds, or bonds. 

Pros of Health Savings Accounts

Here are a series of advantages you derive from using a health savings account. 

  • Opening an HSA account requires no initial deposit. It is possible to change your trustee in HSA every 12 months. Also, you can get insured HSA accounts (up to $250,000) from banks and credit unions.

  • Your boss, alongside any qualified family member, can donate to your HSA even though there is a limit for such contribution. Your employer contribution is not income, and you qualify for a tax deduction on every contribution you made and whatever your family member contributes.

  • You can use such funds for medical expenses that qualify for your spouse or dependent kids, and they need not be part of your health plan coverage.

  • When you retire, such funds can be used to pay medical bills that qualify, which could be for a spouse or dependent kids, even if your health plan does not cover them. 

  •  You can move from the investment portion (mutual funds or stocks) of your account to settle any medical bills.

  • Unemployed people can contribute to their HSA account. Such contributions, however, will be after-tax dollars which makes them deductible from the tax return.


Cons of Health Savings Account 

Before considering a health savings account, make sure to be aware of the cons as well.

  • Should you withdraw for any purpose other than medical before age 65, such will be taxed, and you also get slammed with a 20% penalty.

  • A couple of merchants do not validate HSA cards, making it essential to get reimbursement from the HSA trustee.

  • If someone claims you as a dependent on their tax return, you do not qualify for the HSA.

  • Uncle Sam can audit your expenses, making it essential to have a proper record of your entire purchases.

  • HSA accounts come with a low interest rate, and you might be slammed with a monthly fee if your balance goes beyond a given threshold. 

  • You could incur tax penalties if you fail to stop HSA contributions six months before applying for social security benefits. 

  • On getting to age 65, the age specified for Medicare eligibility, you will no longer be able to make extra contributions like catch-up contributions even when employed. 

  • Investments sometimes come with minimum balance requirements, and you will have limited and uninsured investment options.



It might be a good idea to set up some funds for present and future medical expenses. Since HSA funds can be transferred as the years go by, it allows untouched funds to accumulate, giving a high peace of mind that there is financial security in your golden years. 

People who discover that they do not need extra funds for medical purposes can go to satisfy their needs or leaving it to their beneficiaries. 



Jim McClaflin, EA, NTPI Fellow, CTRC
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