What is a health savings account (HSA)?
How does an HSA work?
After you enroll in a high deductible health plan and set up your HSA, you can begin contributing to the account. Advantages to an HSA:
- You own the account, not your employer. You can make deposits like you do with other personal bank accounts. Your employer might add money too.
- The money you contribute is tax-deductible. When you make contributions, your taxable income is reduced.
- You can invest your funds, and the interest or income is tax-free. The money can sit in your account and potentially grow over time, all of it tax-free.
- There’s no “use-it-or-lose it” policy. Since you own the account, the funds roll over year to year and the money stays with you — regardless if you leave your job or retire.
- If you’re under 65 and use the dollars for qualified medical expenses, you can withdraw the money tax-free.
- If you’re over 65, there are no stipulations on how you can use the money. You can continue to withdraw the money tax-free for medical expenses. Or you can use it for non-medical expenses, just pay your regular income tax. Some people even view their HSA as an added retirement account.
If you cash out the money before you’re 65 (and don’t use the money for qualified medical expenses), you’ll have to pay taxes on the amount, and you could be hit with a hefty 20% tax penalty.
HSA eligible expenses
Most dental care
Most vision care
The IRS determines the list of qualified medical expenses (Section 213(d) of the Internal Revenue Code). See the IRS List
Understanding HSA rules and benefits
To help make the most of your employer-sponsored benefit, understand the rules. For instance, an HSA is your money, you never lose it and it could add to your retirement. Many financial experts may advise on utilizing an HSA if you have the opportunity. When considering other options, do the math for your family to figure out what makes sense for your situation. If you still have questions, talk to your company’s Human Resources representative.
Compare HSAs to other health accounts
HSAs are different from Health Reimbursement Accounts (HRA) and Flexible Spending Accounts (FSA). Comparing the different types of accounts may help you understand better how to use these accounts to your benefit.