The combination of an HDHP and an HSA might save you money on healthcare
premiums,
as compared to a traditional first-dollar healthcare plan, if you have low healthcare costs. Its tax advantages could make it a very attractive option, since any money you don’t spend on healthcare could accumulate
tax-deferred
earnings and be used without penalty for nonmedical expenses after age 65.
These advantages may disappear if you have high healthcare expenses. For example, if you had a $2,500 deductible and you incurred $2,500 of medical expenses, you’d spend the $2,500 without ever receiving a penny in benefits from the insurer despite paying for premiums.
Furthermore, you wouldn’t be able to take much advantage of tax-free earnings in your HSA since all the money would be spent.
In addition, once you qualify to have your future costs covered, you still owe a co-payment for each service up to the plan cap.
Making the decision
Because medical costs have been rising at a rate much higher than inflation and tend to rise with age as well, the choices you make about your and your family’s healthcare can have a huge impact on your overall quality of life. If you do have options for healthcare, it’s important to take the time to weigh them carefully and make the decision that gives you the best healthcare for your dollar.
In essence, you need to decide whether the savings on premiums and the tax advantages of an HSA are worth the risk of spending up to the deductible. One way to do this is to look at your family’s current health and your recent healthcare expenses, and calculate how much it cost you last year to pay for healthcare, and how much it might have cost you if you’d been insured with an HDHP plus an HSA.
You also have to ask yourself if you’d be willing or financially able to contribute the maximum to your HSA. If you don’t have money in a tax-free account to pay for your out-of-pocket expenses, you’ll be paying for care with after-tax dollars. That takes a bigger bite from your budget. However, you can accumulate savings throughout the year and reimburse yourself at a later date.
Inheriting an HSA
If you name your spouse as beneficiary of your HSA, it becomes his or hers at your death. The money in the account can continue to accumulate tax-free earnings and be used to pay qualifying medical expenses. But if you name someone other than your spouse as beneficiary, at your death the HSA ends. The beneficiary must determine its fair market value and count that amount as income for the year.
