Personal Finance Essentials

Health Savings Accounts

Health Insurance > Health Savings Accounts

A Health Savings Account – or HSA – is a savings account designed to help you pay for qualified medical expenses, either now or in the future.

Think of it as a dedicated account where you set aside money specifically for healthcare costs, with the added benefit of significant tax advantages.

Eligibility Requirements

To open and contribute to an HSA, you must meet three conditions. You must be enrolled in a High-Deductible Health Plan (HDHP). You cannot be enrolled in Medicare. And you cannot be claimed as a dependent on someone else’s tax return.

The Three Tax Advantages

HSAs come with three important tax advantages that, taken together, make this one of the most efficient accounts available to you. 

  1. Contributions are tax-deductible. The money you deposit into an HSA reduces your taxable income in the year you contribute, just like a traditional IRA or 401(k). 
  2. Growth is tax-free. You can invest the money in the account as you see fit. Any earnings – interest, dividends or investment gains – accumulate without being taxed. 
  3. Withdrawals for qualified medical expenses are tax-free. When you use HSA funds for eligible healthcare costs, you pay no tax on the withdrawal. 

Unlike a Flexible Spending Account, HSA balances roll over from year to year. There is no use-it-or-lose-it rule. That means you can allow the account to grow over time and use the funds in retirement, when healthcare costs tend to be at their highest.

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