Health Savings Accounts are a way to set money aside for medical expenses before taxes if you have a high-deductible health insurance plan. You can use HSA funds to pay for qualified medical expenses and deductibles, copayments, and coinsurance. By using pre-tax money to pay for these costs, you can lower your overall health care expenses. Only people enrolled in a high-deductible health plan or HDHP may contribute to a health savings account.
HSAs Have Triple Tax Advantages
- You don’t pay taxes on contributions to health savings accounts.
- You don’t pay taxes on any interest or dividends your HSA earns.
- You don’t pay taxes on HSA withdrawals used to pay medical expenses.
These three tax advantages mean that using a health savings account saves you money. Compared to paying for medical expenses with after-tax dollars, using pre-tax dollars can save you thousands. The exact amount you’ll save depends on your contributions and income level.
HSAs Can Help Save For Retirement
There’s an additional advantage to having an HSA: they can be a great way to save for medical expenses in retirement if you can afford not to use the funds right now. Unlike a flexible spending account, you don’t have to spend all of your HSA money each year – HSA balances roll over from year to year without penalties. And unlike an IRA, there are no required minimum distributions at a certain age, meaning you can keep your HSA as long as you like. You’re more likely to have large medical expenses during your retirement years. Being able to pay for them from an HSA instead of your 401(k) or IRA can make a big difference in your financial security.