Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Health Savings Account (HSA)

What it is:

Health savings accounts (HSA) are tax-free savings accounts connected to high-deductible health plans (HDHP). HSAs are used to cover healthcare-related expenses not covered by an HDHP.

How it works (Example):

Individuals with HDHP pay small annual premiums for health coverage with a sizeable deductible (generally $1,500 or more). As a result, this type of plan allows holders to maintain and contribute to an HSA individually or as part of a group plan administered by an employer.

HSA contributions are tax deductible and also accrue interest free of tax. Withdrawals are tax-free provided that the money is used for health-related expenses, and the balance of the account rolls over from one year to the next. Once the account holder reaches retirement age, he/she is eligible for distributions from the HSA similar to those that are made from a traditional IRA

Why it Matters:

It is important not to confuse an HSA with a health reimbursement account (HRA), which is a savings account funded and managed by an employer for reimbursing employees for expenses not covered by a group plan. HSA holders are allowed to contribute only a certain amount each year, and any withdrawals used for purchases other than health expenses are taxed as regular income.