Health care expenses are inevitable. In fact, the average American household spends $5,000 per year on health care. Health Savings Accounts, or HSAs, are a lesser-known savings vehicle but are becoming more and more popular for good reason. If you like getting discounts instead of paying full price on anything you shop for, health care expenses should be no different.

Traditional long-term savings and investment planning almost always involves discussion of retirement accounts such as IRAs and 401(k)s, but typically not the HSA. That trend is slowly starting to change. People are becoming more aware of the incredible advantages of saving for health care in a tax-advantaged way.

Here are the key things you need know:

What is an HSA? Health Savings Accounts allow you to save for health care expenses in a tax-sheltered way. Contributions are tax-deductible. Growth and interest earned are tax-free. Withdrawals are tax-free if the money is used for qualified health care expenses. The amount you can save per year in such an account is limited. In 2020, the limit was $3,550 for individuals and $7,100 for families. An additional $1,000 catch-up allowance is available for those older than 55.

Am I eligible to contribute? You must have a high-deductible health plan to participate. If you are unsure if your health plan allows for HSA savings, you need to look at the deductible and the out-of-pocket maximum. For individuals, the annual deductible must be at least $1,400 and the out-of-pocket maximum cannot be more than $6,900. For families, the deductible is $2,800 and out-of-pocket maximum is $13,800.

How does the money get invested? HSA savings can be depository in nature, meaning it can operate like a bank account, or it can be invested for growth. This is where long-term strategy needs to be considered, especially for high-income earners who have the ability to save the maximum each year.

Can I contribute to an HSA in retirement? Yes, but you must be younger than age 65. After 65, HSAs can be used for anything, not just medical expenses. That makes the HSA incredibly flexible. However, withdrawals made after age 65 for nonmedical reasons will be taxable (similar to pre-tax retirement accounts).

Are fees associated with an HSA? Cost matters! Be sure to evaluate expenses charged by HSA providers. Some have annual maintenance fees or fees related to investments such as mutual funds or exchange-traded funds. The lower your costs, the more your savings will work for you.

Now is a perfect time to evaluate if a Health Savings Account can fit into your financial planning. Individual health care plans and many employer plans operate on the calendar year, meaning they end Dec. 31. If you are considering your options for next year, now might be an excellent time to choose a plan that allows participation in an HSA. The benefits are incredible for both short-term and long-term savings!

The views expressed represent the opinion of Uncommon Cents Investing. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results. Investment advisory services offered through Uncommon Cents Investing, a registered investment adviser.

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The Insiders: This article is sponsored by Uncommon Cents Investing

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