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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, you 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 you may use or keep your funds depending on your financial needs.
In short, an HSA is like a 401(k) or IRA for your 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 you have an HSA-qualified HDHP, contact your health insurance provider.
Contributions can be made through pre-tax payroll withholding, or they can be made after-tax and deducted on your tax return, even if you don’t itemize
Account earnings grow tax free
Withdrawals for eligible medical expenses are tax free for you, your spouse or your tax dependents
If your spouse is your beneficiary, the HSA becomes his/hers and can still be used tax free for eligible medical expenses.
If your spouse is not your beneficiary, the HSA becomes part of your estate, and fair market value is calculated on your date of death.
You are responsible for determining whether you are eligible for an HSA, whether your contributions/withdrawals are qualified and for seeking tax, legal and/or investment advice as needed.