How to Choose a Health Savings Account

A health savings account is a tax-sheltered account to be used specifically for paying qualified medical expenses. This type of account is generally offered with high deductible health plans. Many plans are available, and if you know the basics about the plans, choosing the right one is not as difficult as you might think. Read on to learn how to choose a health savings account.

Instructions

Difficulty: Moderate

1. Know the fundamentals. All contributions are tax-deductible and all withdrawals for qualified medical expenses are tax-free. Any interest earned on your health savings account is tax-free and any balance at the end of the year carries over to the next year.
2. Understand ownership. You own your health savings account, not your employer. If you should leave your job, your account goes with you.
3. Understand the terms of a high deductible health plan. These plans are basically meant to cover major medical expenses after your deductible is paid.
4. Evaluate your current medical expenses. A health savings account is meant to cover expenses that are considered to be routine, such as yearly physicals, minor dental work and vision care.
5. Assess your financial ability. If you have the financial means to cover all of your routine medical expenses as they arise, a health savings account may be unnecessary.
6. Shop around. Many banks and credit unions offer health savings account plans, but you might consider your insurance company and other insurance or investment companies to find the right account for you.
7. Narrow your options. After shopping around, narrow your choices to your top three. Call them or go to the company website to receive an individual quote.
8. Choose your health savings account. Once you have received a quote, choose the plan that best suits your needs.

Tips & Warnings

• Do your homework when shopping around for quotes. Some companies that offer health savings accounts have a fixed rate of return on the money you deposit into your account, while others might offer a variable rate.
• Make sure your money is easily accessible. You don't want to have to jump through hoops of fire in order to access the money when you need it. Choose a company that offers checks, debit cards or electronic funds transfers.
• Be aware of tax-exempt contribution limits. The amount you voluntarily contribute into your health savings account has a limit. Check your individual policy and double check your limits.
• Be aware of your withdrawals. Withdrawals from you health savings account are exempt from taxes for qualified medical expenses only. If you withdraw for any other reason, you are subject to a 10 percent penalty.
• Know your eligibility. If you are on Medicare, have a health plan that is not a high deductible health plan or have no health coverage, you are not eligible for a health savings account.