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This article was first published in may and has been updated with new HSA contribution limits for 2020 and other figures.

Put in some extra times when you can choose your health insurance plan and you may find you can pay much lower premiums as well as lower health care costs for the rest of your life.

If you have health insurance through your employer or purchase coverage through an exchange created through the affordable care act of 2010, the combination of lower cost, high deductible health insurance and a health savings account can provide great Benefits. You save on taxes right away, the money can be invested for decades, and-unlike an IRA or 401 (k) account – you may never have to pay taxes on any of them.

People often refuse to consider opening a medical savings account because they believe it is a flexible expense account. They are very different.

The flexible spending account, or FSA, is offered through your employer’s health insurance and allows you to set aside up to $ 2,700 in pre-tax money (the IRS can raise the limit each year). This money should be used to pay out-of-pocket medical expenses for you and your family that tax year or it is lost, except for the $ 500 that the IRS allows you to carry over to the next year. So the FSA can be useful if you have a good idea how high your out-of-pocket expenses will be, and if you don’t contribute too much.

Read: How to make the most of your HSA – for now, and in the future

A health savings account (HSA) works in different ways. First, you are only eligible if you have a high deductible insurance plan. Second, you can hide a lot more money from taxes. Up to $ 3,550 (for an individual) or $ 7,100 (for a family) in pre-tax money is withheld by your employer (or set aside by you, especially if you buy your own health insurance) and placed in the HSA each year. (This is the 2020 limits. Again, amounts can change every year.)

As an FSA, you can use the money in the HSA to pay out-of-pocket tax-free medical expenses. But the HSA doesn’t have a “use it or lose it”feature.

Of course, this assumes that you have the ability to pay today’s out-of-pocket expenses with other funds.

The ability to increase your deferred tax savings can be especially important if you are self-employed or if there is no employer sponsored retirement account available to you. Federal law allows a person with a 401 (k) or similar employer-sponsored retirement account to put away up to $ 19,000 in pre-tax dollars (plus another $ 6,000 if you’re 50 or older) each year. But the limit for individual retirement account (IRA) contributions is just $ 6,000, plus another $ 1,000 if you’re 50 or older. (This is the limits of 2019. The 2020 limits are expected to be announced in November.)

If you buy your own insurance through the exchange, you may find a high-deductible health insurance plan, known as HDHP, much more affordable than a low-deductible plan. Of course, the same may be true for health insurance arranged through an employer.

David Mendels, Director of planning with Creative Financial Concepts in new York, said that for people buying HDHP through the exchange, the HSA is “an absolute no-brainer or no-brainer. You’re going to get a tax deduction, you’re still going to get money, and you can get it tax-free.”

There’s also the potential for free cash from your employer. Many contributions conform to the HSA up to a certain limit. In its year-end HSA research report, Devenir (which provides investment services to HSA administrators) estimated that the average employer contribution to HSA increased to $839 in 2018 from $604 in 2017.

Once you’re 65, you can withdraw money from your HSA for any purpose, not just to cover health care costs. If you spend it on qualified health-related expenses, withdrawal is tax-free, just like at any age. If you take the money for another reason, you will have to pay income tax.

You can even “reimburse yourself”, tax-free, for qualified medical expenses you paid for out of pocket in previous years. Not pressing the hSA for out-of-pocket expenses now means you can enjoy the benefits of tax-deferred growth for longer, while still claiming the benefits of tax-free health-related expenses.

Unlike an IRA or 401(k) account, there is no required minimum allocation from an HSA at age 70 1/2. Given how likely it is for you to have high medical expenses later in life, it’s likely that some or all of the HSA money will never be taxed.

To participate in the HSA, you must be enrolled in a high deductible health insurance plan, which means that the annual deductible must be $ 1,400 for an individual and $ 2,800 for a family. The annual out-of-pocket HDHP maximum cannot exceed $6,900 for an individual or $13,800 for a family. (These are 2020 figures).

Higher deductibles and higher potential out-of-pocket maximum numbers can be a bit scary. However, this is where the potential lies.

Here are the questions you should answer in the HSA decision-making process:

How much would you save on premiums if you participated in a high deductible health insurance plan rather than a more expensive plan with lower deductibles?

Will these savings from lower premiums exceed the amount of the additional deductible?

If you add in your employer’s contribution (if any) to the HSA, will that plus your premium savings exceed the additional deductible?

Finally, you have to think about your specific circumstances. Do you or your family members have serious ongoing medical conditions that can make a low deductible plan the best for you?

Mendels said it may also be important to think about treatments or doctors who may not be covered by your insurance. “There is a much wider range of costs that you can cover with an HSA than would be covered by almost any medical plan,” he said. One example he cited was a new Jersey resident who has a doctor in new York not covered by her insurance plan.

Once you answer these questions, you can decide for or against the HDCP/HSA combination.

If you buy health insurance through the exchange, your decision points are pretty much the same, except that there is no employer contribution to the HSA.

Ken Roberts, an investment adviser at IWC Asset Management in Carmel, California, said some people are reluctant to consider HSA because they take a very simple approach: They want a lower deductible.

But, he added: “I like HSA because if you don’t need it, it’s still savings that didn’t go to the insurance company. It gives you an advantage.”

Dean Mason, CEO of HealthSavings administrators, prefers to call a high deductible health plan a “low premium plan”.

“What you will find in a low premium plan is that the savings you accrue on the premium tend to fully cover your out-of-pocket risk,” he said. This is certainly more likely if your employer meets some of your HSA contribution.

HealthSavings, based in Richmond, Virginia, has about $ 818 million of assets under management and operates HSA plans for employers and individuals. the Company is owned by BluffPoint Associates, a private equity firm in Westport, Conn.

If you have an HSA through your employer, your contributions will likely be made with pre-tax dollars withheld from your salary, hopefully with an appropriate contribution from the employer. You can also opt for HSA funding outside of work. This can be a good option if there is no appropriate contribution available or if you find your employer’s HSA plan too expensive or that its investment offers are too limited.

If you qualify for an HSA when buying your own health insurance through the exchange, you will need to go to the HSA administrator yourself to make contributions.

“At the most basic level, just like with a 401 (K), if you’re going to participate before you do, take a look at what the costs are. A specific HSA can be so expensive that it’s not worth doing, ” Mendels said.

Not only do you need to know about HSA administrative costs, you need to know what investments, if any, will be available.

Eric Remjeske, co-founder and president of Devenir, pointed to HSASearch, a website run by his company, where you can compare HSAs’ administrative expenses and investment choices. If you click “all HSA providers” on the top left, you can see that scores of providers have no administrative fees, but the majority also have no investment options available. This means you would be following a FSA-like “save and spend” model, possibly wasting some of the benefits of your HSA. The site has various other tools you can use to compare HSAs if you are looking for your own provider.

If you enroll in an HSA through your employer, the plan administrator can place your money in a money market Fund (earning a very low interest rate) by default. One reason for this is that you may be required to create a minimum cash balance before investing the rest of your money in mutual funds for long-term growth. This makes sense because even if you are using your HSA long-term vehicle investment, you may need to use some of the money to cover out-of-pocket medical expenses at any time.

But the default choice means many participants will never change the investment choice for their HSAs. This can lead to a huge loss of potential investment returns over many years or decades. A phone call to the plan administrator to discuss your investment options and their costs is time wasted.

In its year-end report, Devenir estimated that only 19% of HSA balances were invested as of December 31, with the rest sitting in cash. Devenir also estimated that the number of HSA accounts increased by 13% during 2018 to 25 million, and total assets in HSA accounts increased by 19% to $53.8 billion.

Mason touted the benefits of “investment-oriented HSAs” that allow participants to “first dollar invest” rather than requiring a cash balance to be accumulated first. At HealthSavings Administrators, members do not have minimum balances and can “invest in institutional class funds immediately, max out their contributions, and start accumulating assets,” he said.

“These initial dollars make a difference in treating HSAs as a long-term investment vehicle,” he added.

The emphasis on institutional classes of stocks is important for investors looking for those managers who choose stocks, or what is called active management. Note that active managers on average struggle to outperform funds that passively track the index, especially over several years.

Your obvious path to the lowest expenses is to choose broad index funds with low expense ratios. But if you want to diversify with active management, an institutional stock class can have much lower costs than the stock class typically offered to individuals.

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