Health savings accounts (HSAs) are similar to IRAs, except they're intended for medical expenses rather than for retirement. You can make a tax-deductible contribution to an individual HSA or to a family HSA. If you’re 55 or older, your annual contribution can be larger.
If your employer makes the contribution as part of a cafeteria benefits plan, it isn’t taxable to you. Earnings on investments made with your contributions won’t be taxed currently, and withdrawals are also tax-free if they are used for a broad range of medical expenses.
To be eligible for an HSA, you must be covered by a health plan with a high deductible. These high deductible health plans can save you money, since they should have lower premiums. You must be under 65, and therefore not eligible for Medicare, when opening an HSA. If you withdraw HSA funds for non-health expenses, you’ll pay taxes, plus be subject to a penalty if you do it before age 65.
The distinction between an HSA and other tax-favored medical savings accounts is that the money in an health savings account can be invested while the earnings grow tax-free. In addition, withdrawals used for medical expenses are not subject to income tax.
In contrast to funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. After age 65, withdrawals from a health savings account can be made and used for any purpose penalty-free but not income tax-free.
It is probably worthwhile to explore if a health savings account would be a good tax-saving opportunity for your financial situation.
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