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Health Savings Account (HSA)

According to the website, health savings accounts (HSAs) are “a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.” First introduced in 2007, HSAs largely replaced the older model of medical savings accounts (MSAs). An HSA is intended to reduce health care costs and offer tax advantages for individuals and families. In order to contribute to an HSA, you must have a high-deductible health plan. That currently entails a deductible of $1,400 for individual coverage and $2,800 for family coverage.

Health savings accounts are offered by many banks, credit unions, and other financial institutions. HSAs are distinct from flexible spending accounts (FSAs), which require you to use your tax-free funds before the end of your plan year.  HSA funds roll over from year to year. HSAs also differ from retirement savings accounts like 401(k)s and IRAs, which set rules on minimum distributions and the age at which users must begin withdrawing funds. HSAs have no such limitations.

The tax advantages of an HSA include:

  • Contributions to HSA funds are tax deductible and untaxed, including both individual and employer contributions
  • Earnings from interest and investments like mutual funds are not taxed by the Internal Revenue Service (state tax policies for HSAs vary)
  • Tax-free withdrawal and distribution of funds for qualified medical expenses

You cannot currently qualify for an HSA if you are enrolled in Medicare or claimed as a dependent on someone else’s tax return. However, anyone over age 65 can choose to decline Medicare in favor of contributing to an HSA.

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