Understanding Health Savings Accounts

Is an HSA the right option for you?

With the potpourri of healthcare options on the table, you’ve probably heard of a Health Savings Account (HSA), but do you understand what exactly it is, how it works, and whether you need one?

What is a Health Savings Account?

An HSA is a tax exempt or custodial account established exclusively for the purpose of paying qualified medical expenses; however, there are some conditions. An HSA works in conjunction with a High Deductible Health Plan (HDHP). Individuals who elect HSA/HDHP accounts make financial contributions to their HSA to cover approved medical expenses. The HSA serves as an investment account from which you withdraw money tax-free for needed medical care. Funds paid from the HSA account for medical expenses satisfy the HDHP’s deductible, which is often higher than a traditional insurance plan. Once the deductible has been met, a companion HDHP then covers all additional medical expenses as defined by the plan’s documents.

Who Can Open a Health Savings Account?

An HSA is not for everyone, but it can be the appropriate healthcare route for some. Individuals who find monthly insurance premiums difficult to afford might benefit from opening an HSA along with an HDHP.

In order to open an HSA, you must be covered by a qualified HDHP and you cannot be covered by any other health plan or Medicare. Furthermore, to qualify for an HSA, you cannot be claimed as a dependent on another person’s tax return.

Spending from Your Health Savings Account

When you open an HSA, you can conveniently access your funds with a debit card to pay medical expenses. If you do not use the money in your HSA, it continues to accumulate with tax-free interest until your retirement. After retirement, you can make withdrawals from your HSA for any purpose, but you’ll pay the applicable level of income tax. If you need to withdraw funds from your HSA for non-medical expenses prior to retirement (age 65), you will be subject to a 10 percent penalty in addition to income taxes.

An HSA is similar to an IRA; however, HSAs are specifically dedicated to medical expenses. You own and control the funds in your HSA. Money you contribute to your HSA is federally tax deductible, whether or not you itemize deductions.

Advantages of a Health Savings Account

If you qualify for an HSA/HDHP account, there are some advantages to choosing this healthcare option:

  • Lower monthly healthcare premiums than with regular plans
  • Money saved on monthly premiums can be added to the HSA
  • Contributions can be made to an HSA by an individual, an employer, or both
  • You own your HSA and you choose how to invest the funds
  • HSA contributions are tax deductible
  • Interest earned is not taxable
  • Withdrawals for qualified medical expenses are tax-free
  • Funds are rolled over each year, so the money continues to grow if not used
  • Freedom of choice to see any physician you choose