How to Buy a Health Savings Account

by : Jim Waltrip

Congratulations! Pat yourself on the back for wisely choosing to open a self-directed health savings account, or HSA, as a means to augment your low-premium high deductible health insurance. Planning ahead by establishing a savings and investment plan for the money you set aside for health care each year definitely has its advantagesas long as you know how best to work your HSA benefits to your advantage, both now and in the future.

Established in 2003, HSA is the new kid on the block to the financial planning scene, and has been extremely popular with those who want to invest their money with an eye toward affordable health care. A self directed health savings account is an interest bearing account that may be tapped now or later to pay for medical expenses. Interest on an HSA account is compounded daily and credited monthly.

One distinct advantage to an HSA is that it places you in control of the account; decisions on how to spend money in your account are made by you without having to ask the permission of your insurance company or a third party. You may also decide what types of investments you would like to make with the money in your account to help it grow.

The only requirement for establishing an HSA is that you purchase a low-premium high deductible health plan (HDHP). An HDHP, also known as a catastrophic health insurance plan, is typically an inexpensive health insurance policy that does not cover the first several thousand dollars of health care expenses, but offers coverage once the deductible has been met.

You may create your HSA through your bank, credit union, insurance company, or any of a number of approved companies, and it is also possible that your employer may have set up an HSA as part of his or her employee package.

Generally, HSA policyholders have access to 24-hour customer service and online enrollment. And usually, for a nominal annual fee, the package includes a debit card and unlimited check writing, as well as online access to account information. You may authorize your medical service provider or another person to initiate an electronic withdrawal from your account, and you may also purchase goods and services at medical service provider locations that accept signature-based debit cards on their premises.

According to the U.S. Department of the Treasury, a HSA offers distinct tax advantages. Contributions may be made by the individual or as a family, even if you do not itemize deductions. Also, an individual's employer may make contributions that are not taxed to either the employer or the employee, and employers sponsoring cafeteria plans may allow employees to contribute untaxed salary through salary reduction.

Distributed funds from your HSA are not taxed if used to pay for qualified medical expenses. And, unlike funds relegated to Flexible Spending Arrangements, funds in your HSA account are not forfeited if not used by the end of the year. Instead, your unused funds roll over to the next year and remain available for your use in later years.