Never Opened an HSA Before? Here Are 3 Good Reasons to Start

You never know when you might get hurt or run into a health issue that winds up being expensive. If you don't have enough money in your savings account to cover your healthcare costs, you could easily wind up in debt over a situation you had no control over.

That's why it's so important to set aside money for medical bills. And while you could always stick more money in the bank, if you're eligible for a health savings account, or HSA, then it pays to open one.

An HSA allows you to save and invest money for near-term and future medical bills. Unlike with an FSA (flexible spending account), you don't have to use up your HSA balance every year. In fact, it's a good idea not to use up your balance every year if you can help it, since HSA funds can be invested over time so you have even more cash reserves to tap for medical bills.

Not everyone is eligible for an HSA. Your health insurance plan must meet certain requirements that change yearly for you to open one.

This year, your health plan has to come with a minimum deductible of $1,500 for self-only coverage and $3,000 for family coverage. Your plan also needs to have an out-of-pocket maximum of $7,500 for self-only coverage and $15,000 for family coverage. But if your health insurance plan is compatible with an HSA, then it pays to open one for these key reasons.

1. You can potentially avoid medical debt

The Kaiser Family Foundation reports that roughly 23 million Americans carry medical debt. And that can be a very stressful situation to be in, not to mention a costly one.

If you fund an HSA, you'll have money to tap for medical bills. That could spare you a world of aggravation. And if you're able to leave some of that money alone for a few years, all the while investing it, you might end up with a larger balance by the time a major medical issue arises that costs a lot to treat.

2. You'll get a tax break on your income right away

The money you contribute to an HSA goes in on a pre-tax basis, the same way you get a tax break on traditional individual retirement account (IRA) and 401(k) contributions. So if you put $1,500 into an HSA this year, that's $1,500 of income the IRS won't tax you on.

Meanwhile, let's say you're in the 22% tax bracket. Not being taxed on $1,500 of income means saving $330.

3. You'll have back-up retirement savings once you turn 65

Because you're not required to spend down your HSA balance each year, you can carry a balance all the way into retirement. Meanwhile, costly penalties can apply for taking HSA withdrawals for non-medical expenses. But once you turn 65, those penalties go away. At that point, if your health is great and your medical bills aren't so hefty, you can use your HSA as a back-up retirement savings plan and dip into it as needed to cover general costs or even splurges.

It's worth noting that HSA withdrawals are tax-free when used for medical spending. While you won't be assessed a penalty for taking withdrawals for non-medical reasons once you turn 65, those withdrawals will be taxable in that situation. But that's no different than withdrawals from an IRA or 401(k).

Funding an HSA could do a lot of good things for you. So if your health insurance plan is compatible with an HSA, then it pays to explore your options for opening one. You should also know that you don't need your employer to offer you an HSA. If it's not an option through work, you can reach out to different institutions and open one on your own.