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Simply put, a health savings account (HSA) is a tax-exempt account established for the purpose of paying or reimbursing qualified medical expenses for an individual, spouse or family. To be eligible to open an HSA, an individual must first choose a HSA-qualified high deductible health plan (HDHP).
An HSA provides triple tax savings. Funds are deposited on a pre-tax or tax-deductible basis, earnings grow tax free and withdrawals for qualified medical expenses are tax free.
HSA funds roll over from year-to-year, and can be used or saved depending on your financial needs.
In short, an HSA is like a 401(k) or IRA for medical expenses, only better because withdrawals for qualified expenses are tax free.
A high deductible health plan (HDHP) is a health plan that typically has a higher deductible than other health plans, and the individual is responsible for paying medical expenses until their deductible is met. Yearly exams and preventative care are covered 100% through an HDHP, so the individual generally pays for treatment, prescriptions, etc. outside of annual prevention. To determine if a HDHP is HSA-qualified, contact your health insurance provider.
Contributions can be made through pre-tax payroll withholding, or they can be made after-tax and deducted on a tax return, even if an accountholder doesn’t itemize
Account earnings grow tax free
Withdrawals for eligible medical expenses are tax free for the HSA owner, the owner’s spouse or the owner’s tax dependents
If the accountholder’s spouse is his/her beneficiary, the HSA becomes his/hers and can still be used tax free for eligible medical expenses.
If the accountholder’s spouse is not his/her beneficiary, the HSA becomes part of the accountholder’s estate, and fair market value is calculated on the date of death.
The HSA owner is responsible for determining whether he/she is eligible for an HSA, whether his/her contributions/withdrawals are qualified and for seeking tax, legal and/or investment advice as needed.