The Beauty of Health Savings Accounts

Written by Kara Stefan

If you haven't enrolled in a tax-deferred health care account, you're giving too much to Uncle Sam.benefits of a health savings account

One nice thing about leaving your twenties is that life becomes a bit more predictable. Some examples: your income, your lifestyle, how often you visit a doctor, and where you spend Saturday afternoons.

That's why a flexible spending account is so great. It's an employer-sponsored benefit that requires budgeting expenses a year in advance. An FSA allows you to defer pre-taxed money into an account to reimburse childcare or out-of-pocket medical expenses that aren't covered by insurance.

FSAs fall into two categories: A health care reimbursement account, and a dependent care reimbursement account. Initially, you benefit from reduced taxes on your take-home pay, much like a 401(k) deferral.

But the real benefit is using untaxed income to reimburse expenses like your co-pays on office visits and prescription and non-prescirption drugs, eyeglasses, root canals, braces, birth control pills and even a prescribed stop-smoking program. "Through this tax loophole, you can actually reimburse yourself with pre-tax dollars," says Randall Abbott, a senior consultant with Watson Wyatt, Abbott.

The biggest drawback to an FSA is that it's a "use it or lose it" account, meaning whatever balance is unused at the end of the year doesn't roll over — you forfeit the money. You can get around this by opening a health saving account where unused money stays in the account.The wonderful difference with this is that the money you don't spend on medical bills can be rolled over and used for your retirement if you don't use it for medical bills. Check with a financial advisor on this  for more details. For instance, you have to have a high deductible health insurance plan to take advantage of this.
While projecting expenses a year in advance may be a challenge, it's something people with children and ongoing medical issues, such as mammograms, are better able to do than twenty somethings.

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