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.
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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
Frequently Asked Questions
What is a Health Savings Account (HSA)?
A Health Savings Account is a personal savings account that lets you set aside pre-tax money to pay for qualified medical expenses, including doctor visits, prescriptions, dental care, and vision care.
Who is eligible to open an HSA?
To open an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). If your current health plan qualifies, you can open an HSA through a bank, credit union, or other financial institution.
What counts as a qualified medical expense?
Qualified expenses include most medical care and services, prescription medications, dental care, vision care, hearing aids, acupuncture, and certain expenses for your spouse and dependents. The IRS maintains the full list of eligible expenses.
Do I lose my HSA funds if I don't use them by the end of the year?
No. Unlike Flexible Spending Accounts (FSAs), HSA funds roll over from year to year with no expiration. You can let your balance grow and use it for future health care costs
What happens to my HSA if I change jobs or retire?
Your HSA belongs to you, not your employer. You keep the account and all of its funds regardless of job changes or retirement.
Can I earn interest or returns on my HSA balance?
Yes. HSA funds earn dividends, and depending on where the account is held, you may also have investment options available, allowing your balance to grow over time.
Are there penalties for using HSA funds on non-medical expenses?
If you withdraw funds for non-medical purposes before age 65, you will owe income taxes plus a penalty on the amount withdrawn. After age 65, the penalty no longer applies, though the withdrawal will still be subject to income tax.