Have you ever heard of a Health Savings Account (or HSA)? You might have noticed it the last time you were looking through your health insurance options.
Although the name seems fairly straightforward, an HSA isn’t just a dedicated account where you can save money for healthcare expenses. There are a few restrictions on this type of account, but more importantly, there are several unique benefits.
So let’s take a look at Health Savings Accounts. We’ll cover how they work, who is eligible to use one, and how this type of investment can impact your tax planning.
Health Insurance Basics
Here in the U.S., health insurance costs are typically divided into two categories: premiums and deductibles. The premium is the amount you pay every month to maintain your health insurance policy, and the deductible is the initial amount you have to pay yourself before your insurance provider starts picking up (all or a portion of) the bill.
Health insurance premiums can be expensive, whether you work in a traditional corporate job or pay for private health insurance. Most studies show that individuals pay somewhere between $500 and $2,500 per month in health insurance premiums! The monthly cost for family coverage may be even higher. And remember, that money doesn’t even count toward your deductible!
Most health insurance plans fall into one of two categories: a high-premium/low-deductible plan or vice versa (a low-premium/high-deductible plan). As the name indicates, a high-premium plan requires you to pay a significant amount each month to maintain coverage. However, you won’t have to meet a large deductible before your insurance provider starts paying the bills.
A low-premium plan is just the opposite. Your monthly premium costs are lower. However, you have to pay a lot of money “out of pocket” before your policy starts to cover your healthcare costs. Which plan should you choose? The answer depends on your financial situation and the type and amount of healthcare coverage your family needs.
Low-Deductible Plans
A high-premium/low-deductible plan can be a good fit if you anticipate spending a lot of money on healthcare each year. Of course, you might not be able to predict every expense, especially something like a medical emergency, but sometimes you know ahead of time that you’ll be spending a lot on healthcare.
For example, if you plan on having a baby or getting surgery, it might make sense to “prepay” some of those costs in the form of higher premiums. Because the deductible is lower, you won’t have to spend as much on healthcare before your insurance provider starts contributing.
High-Deductible Plans
If you (and your family members, if applicable) typically enjoy good health and don’t anticipate needing a lot of medical care, most experts would recommend that you choose a high-deductible health insurance plan.

You’ll pay lower premiums each month, which gives you a little more room in your budget. However, there’s a risk — if you do end up with a medical emergency, you’ll have to reach a high threshold of out-of-pocket payments before your insurance provider starts covering the bills.
There’s one more feature a high-deductible plan offers: eligibility to use a Health Savings Account.
HSA Contributions
The idea behind a Health Savings Account is that it gives people with high-deductible plans the chance to save up for a medical emergency so the deductible isn’t such a big financial hit.
If you choose a high-deductible plan, you’ll likely be eligible to contribute to an HSA. For most people, opening and contributing to an HSA is beneficial.
How much should you contribute? The easiest way to figure it out is to calculate the difference between the low-deductible and high-deductible plan premiums and contribute that much each month to the HSA.
HSA Tax Advantages
“Savings account” is in the name, but an HSA is really an investment account – and it’s one with significant tax benefits. All of your HSA contributions are tax-free – you won’t pay federal taxes on the money that you put into your Health Savings Account. Depending on your tax bracket, that could mean saving hundreds of dollars each year.

HSAs earn interest and investment returns. Even better, you don’t have to pay taxes on HSA earnings! HSA distributions are also tax-free, as long as you use the money for eligible healthcare expenses.
In other words, an HSA saves you money on taxes in three different ways! And that triple tax advantage makes an HSA an excellent investment option.
An HSA Simplifies Savings
Spending money on healthcare expenses is never fun, especially when it’s a significant amount for something like a hospital stay. But an HSA can reduce that financial impact by giving you an easy (and tax-advantaged) way to save up for potential healthcare expenses.
HSA funds roll over every year, so you can just keep contributing and allowing the account to grow until you need it. An HSA can be a great way to save up for long-term care or healthcare expenses in retirement.
Bottom line: HSAs offer many advantages. But like any financial decision, it’s important to evaluate it in the larger context of your resources and goals. A financial planner can help you make all those crucial decisions, from basic budgeting to complex investment strategies. To learn more about working with Guiding Wealth, schedule a consultation.