How to use an HSA to pay off medical debt

If the prospect of unexpected medical bills keeps you up at night, you’ve got plenty of company. Nearly half of Americans surveyed by the Kaiser Family Foundation (KFF) report that they would have a hard time coming up with $500 to cover a medical bill, and more than half of people surveyed said someone in their household had skipped care in the past year due to the cost.

That’s enough worry to make anyone sick.

A health savings account (HSA) can be a great way to set aside money today that you can use at any time – next month, or 30 years from now – to pay for medical expenses. In addition to that tremendous peace of mind, saving in an HSA delivers unbeatable tax breaks that will save you money today and in the future.

How to use an HSA to pay off medical debt:

1. Enroll in a high deductible health plan (HDHP). To be eligible to save in an HSA your health insurance must be considered a “high deductible” plan. In 2019 that means an annual deductible of at least $1,350 for individual coverage and $2,700 for a family plan, among other criteria.
2. Open an HSA and start saving. Once you are enrolled in an HDHP you are eligible to open an HSA. 2019 HSA contributions allow individuals to save up to $3,500 and families to save up to $7,000.
3. Make Savings Automatic. If you have an HDHP through work, your contributions will be automatically deducted from your paycheck. If you buy your own insurance, you’ll need to set up a system (it’s easy) to have money sent from your checking account into your HSA. If you want to save up to the max, that would require an individual monthly contribution of $287.50 and $575 for families.
4. Grab your first tax break. Okay, nearly $300 (or $600) a month is a chunk of money. But keep in mind that every penny you contribute to an HSA is tax deductible. Contribute $3,500 and the taxable income you will report to the IRS on your tax return will be reduced by $3,500.
5. Consider your Saving and Investing options. If you don’t have any other savings—such as an emergency fund – to cover a medical bill, you will want to keep your HSA balance in a safe savings account. The interest rate you earn isn’t much, but that’s not the point. You want to know that every penny will be there if and when you need it. Over time, as your HSA balance grows (or your cash flow grows), you may want to consider investing a portion of your HSA for growth.
6. Withdraw money from your HSA – tax free – to pay your medical debt. You can use money in your HSA to pay qualified medical expenses at any time. That could be next month if your budding soccer star tweaks her knee and needs an MRI, or thirty years (or more)  from now when an older you will likely have some aches and pains that require care. Every penny you withdraw will be 100 percent free of federal tax.