A health savings account is a way for an individual to set aside funds for health care expenses. There are many financial and tax-related benefits to owning an HSA. You must consider your personal health or that of your family members as well as your household’s financial situation before opening an HSA. But, if you can afford it, it almost certainly is worth having.

Basics and eligibility

Health savings accounts, commonly called HSAs, are made up of pretax deductions from your paycheck and/or after-tax deductible contributions you make to the account. To be eligible to open an account, you must be enrolled in a high deductible health plan. These plans charge lower monthly premiums but require you to pay a higher deductible—your out-of-pocket cost—before health benefits kick in. You cannot be claimed as a dependent on someone else’s tax return and be an HSA owner.

Funds from an HSA have to be used for qualified medical expenses. You can contribute up to $3,400 per year, and unused funds remain in the account to be used in future years. Many HSAs give account holders a debit card to access their funds, while others require the account holder to pay the expense and request reimbursement from the plan.

Lower premiums and tax benefits

If you are relatively healthy, it might not make sense to you to pay a large insurance premium every month. However, you might be concerned about going without insurance at all. What if you have an accident and need critical care? High deductible health plans are good for these situations because the monthly premiums are lower. You will have to pay more money out of pocket before the insurance benefits kick in, so you are charged less premium up front.

While your money is in the HSA, it earns interest. This interest is tax-free so long as it is withdrawn to pay for healthcare expenses. In addition, your contributions to your HSA reduce your taxable income for the year. With the recent tax changes enacted by the Tax Cuts and Jobs Act, many people who used to use medical expense as one of their itemized deductions will find that they no longer have enough expense to outweigh the increased standard deduction. But, they may be taking tax hits from lost exemptions or other details in the TCJA plan. An HSA can help shield these individuals from these changes.

When it’s a bad idea

If you have a lot of health issues, a high deductible is a scary thing. It could prevent you from being able to seek care at all, making the HSA not at all helpful. You also need to keep your receipts to prove that withdrawals from your HSA were used to pay medical expenses. More visits mean more pieces of paper to keep track of. When you’re feeling poorly, that’s probably the last thing on your mind.

The benefits of an HSA depend on your ability to actually deposit money into it. If you happen to be living paycheck-to-paycheck, it could do more harm than good to try to sock away money for health expenses. Should you need to withdraw the funds in an emergency for anything other than health expenses, you will pay tax penalties of 20 percent.