HSAs, or Health Savings Accounts, and ESAs, or Coverdell Education Savings Accounts, are both ways for consumers to invest in their future by putting money away for a specific purpose. While many people are aware of the existence of these types of accounts, not many consumers know the difference between them or how they differ from a traditional IRA. Here’s everything you need to know about HSAs and ESAs before making an investment.
What is an HSA?
A health savings account is a savings account where consumers can put away money for medical expenses that meet HSA qualifications. This essentially allows them to establish a rainy day fund for moments down the road where they need to cover treatments. However, here are a few factors to keep in mind when considering an HSA —
- A high deductible health plan, or HDHP, is required to qualify, and you do not qualify if you use Medicare currently.
- The account owner cannot be claimed as a dependent on another person’s independent tax return to have an HSA.
- An HSA is self-directed, meaning you can invest just like the other IRA’s.
- Unlike an FSA, the HSA is not a “use it or lose it account”. Funds contributed to an ESA continue to exist in the following year if no medical expenses were incurred.
- The contributions you make towards your HSA are entirely tax deductible and distributions are TAX-FREE for qualified health expenses.
So, if you are planning on saving for medical care anyway, there are many financial benefits to setting up an HSA.
What is an ESA?
Coverdell Education Savings Accounts (ESAs) are designated savings accounts that you can use to put away money for a beneficiary’s education. Unlike an HSA, an ESA can have multiple contributors, as long as their individual MAGI is less than $110,000, or $220,000 for couples filing together. ESA’s are often mistaken for 529 plans which unlike an ESA, is not self-directed. Also, 529 plans are state specific, where the ESAs are not.
ESAs are a good way for multiple family members to contribute to a child’s future and current education. The funds can be used for both elementary and secondary qualified expenses, like tuition, fees, books, room and board, and more. Even though contributions cannot be made after the beneficiary has turned 18 (unless they have special needs), you can still continue to invest the account and use that money for qualified education expenses until they reach age 30.
Interested in saving money for future health expenses? It’s easy to get started! Contact a Quest specialist today to learn more.
Take advantage of our Last Month Rule Promotion! Open an HSA account with Quest Trust Company by Dec 1st and get your Opening Fees waived.