Losing Sleep Over Healthcare Costs? An HSA Could Help

Handling medical issues is difficult at the best of times. It's even worse when you aren't sure how you'll pay for the care you need. Unfortunately, that's the situation millions of Americans face. According to a report by KFF, 47% of U.S. adults are finding it difficult to afford healthcare. And a quarter of people said they've put off getting treatment because of the costs involved.

The financial challenges are worse for those without health insurance. But even people with insurance are having difficulties. The report shows that 48% of insured adults worry about how they'll pay their premiums. Many with workplace insurance complain about the costs of seeing a doctor or covering prescription copays.

If you're having trouble paying for health essentials, there are no easy answers. But a health savings account (HSA) could be part of the solution. Here's how.

What is an HSA and how can it help me?

A health savings account is a tax-advantaged way to put money aside for healthcare costs. You need to have a high-deductible health plan (HDHP) to qualify.

• You make pre-tax contributions to your HSA. This means that the money you put in could lower your tax bill today.
• You can defer taxes on any investment gains within your HSA. If you use the money for health expenses, you won't need to pay taxes on that money at all.
• You can make tax-free withdrawals for qualified medical expenses. Once you're over 65, you can take money out for non-medical costs too. Just know that you'll have to pay taxes on those non-health-related withdrawals.

HSAs are not flashy side hustles on social media that promise thousands of dollars for not very much work. But they can save you a lot of money. And they aren't that much work. They're just not super TikTok-friendly.

Show me the money

The maximum you can contribute to an HSA for 2024 is $4,150 on a personal plan and up to $8,300 for family coverage. So if you are in the 22% tax bracket and you put $4,000 into your HSA, you'd reduce your tax bill by $880.

In addition to tax benefits today, those investments will compound over time. If you are worried about healthcare costs later in life, you can let the money accumulate. HSAs don't have any use-it-or-lose-it rules, so you can build up a significant nest egg.

Let's say you contributed $330 a month to your HSA and invested it in an index fund that tracks the S&P 500. History tells us it isn't unrealistic to think you might earn average annual returns of around 8%. That could add up to over $180,000 in 20 years' time if you don't touch the money.

It is extremely rare to find an account with triple tax benefits. You might use a tax-advantaged retirement account to either lower your tax bill today or make tax-free withdrawals once you stop working. But HSAs give you all the benefits at once.

How to open an HSA

You'll need an HDHP to open an HSA, which can also be a great way to lower premiums. But there is a catch: Your out-of-pocket expenses will be much higher with an HDHP. That's one thing if you rarely go to the doctor and quite another if you're managing a serious health condition. HDHPs won't be for everybody.

Think about how much you normally spend on health costs and how those costs would change with different health plans. If you decide to go ahead, here's what you need to do.

1. Make sure you qualify for an HSA

In addition to having an HDHP, you won't qualify for an HSA if you're listed as a dependent on someone else's tax return. Nor can you be enrolled in Medicare. Many people will be able to get an HDHP through their employer. Indeed, some employers will also contribute to your HSA, which could go some way toward paying for healthcare.

If your employer can't help, you can open an HDHP on your own. Just as with auto insurance or home insurance, shop around for the best deal. Check out your state marketplace as well as individual providers. A broker or healthcare navigator can help you with this process.

2. Open an HSA

You may be able to open an HSA through your employer. If not, check out banks, brokerages, and other providers. Pay attention to factors like fees, range of investment options, and minimum balance requirements. It's also worth looking into how you'll be able to access your funds.

If it's a company plan, your employer will deduct your contributions directly from your paycheck. If not, you'll need to fund your HSA before you can choose your investments. Depending on the account, you will likely be able to invest in stocks, bonds, mutual funds, and ETFs. You may also be able to use a robo-advisor to manage your funds.

Key takeaway

For some people, the tax advantages of HSAs can more than make up for the extra costs of a high-deductible health plan. They can be an extremely powerful way to build up your own healthcare fund and ease some of the stress of covering medical costs.