How Does a Health Savings Account (HSA) Work?
A Health Savings Account (HSA) is a personal savings account that helps you set aside pre-tax money for qualifying medical expenses.* It’s an excellent tool for managing out-of-pocket health care costs such as deductibles, copayments, and certain treatments.
To open an HSA, you need to be enrolled in a High Deductible Health Plan (HDHP). These plans usually have lower premiums but require you to pay more upfront for health care services before your insurance kicks in.
How It Works:
- Pre-tax Contributions: The money you contribute to an HSA is not subject to federal income tax, making it a great way to save on health expenses.
- Qualified Medical Expenses: You can withdraw funds tax-free to pay for approved medical expenses. These include items like doctor visits, prescription medications, acupuncture, and even hearing aids. Some expenses for your spouse and dependents may also be covered.
- No Expiration: Any unused funds in your HSA roll over year after year, allowing you to save for future health expenses.
- Portability: Your HSA belongs to you, so even if you change jobs or retire, you keep the account and its funds.
- Tax Penalties: If you withdraw funds for non-medical purposes before the age of 65, you will face taxes and a penalty. After age 65, the penalty is waived, but withdrawals are still taxed.
Should You Contribute to an HSA?
HSAs offer several financial advantages, including the ability to save on health care costs while gaining interest or investment returns on the account balance. They are available through financial institutions like banks or credit unions.
Learn More:
Get more information on HSA-eligible plans (also called High Deductible Health Plans (HDHPs)), including both the minimum and maximum yearly deductible, from the IRS.
*Includes most medical care and services, dental care, vision care, and prescriptions
