A health savings account, or HSA, is a special type of account that you can use to make healthcare expenses more affordable. You contribute pre-tax dollars to your account, and withdrawals aren’t taxed either, as long as you use the money for qualified medical expenses. What’s more, you can place your HSA balance in an interest-bearing savings account or even invest it, and any returns you earn won’t be taxed, either.
The Tax Advantage
This combination of cost-saving features is why you’ll read that HSAs have a triple tax advantage. It’s a unique characteristic that can help you accumulate money faster than you would in a Roth IRA, where your contributions are taxable but investment returns and withdrawals aren’t taxed; in a traditional IRA, where your contributions come from pre-tax dollars and investment returns aren’t taxed but withdrawals are taxable; or in a regular savings or investment account, where your contributions come from after-tax dollars and your investment earnings are taxed every year, too.
What’s the catch? There are two. First, you can only use an HSA if you have a high-deductible health insurance plan (HDHP). And second, you can only contribute a limited amount to your HSA each year.
The good news is that when you pick an HDHP, the premiums will be lower than if you chose an equivalent insurance plan with a lower deductible. If your healthcare expenses for the year are low, you can save money this way.
Another benefit of HSAs is that they are portable. If you change jobs, you can take your HSA with you; it isn’t tied to your employer. You can also carry over any unused balance from one year to the next; your contributions aren’t “use it or lose it.” You can contribute to an HSA through payroll deductions or from your bank account. Someone else, like an employer or relative, can also contribute to your HSA.
In this tutorial, we’ll cover all the basic information you need to know about HSAs, such as how to qualify, how much to contribute, how to use your contributions and how an HSA can benefit you in different life stages. We’ll make sure you know the difference between HSAs and the similarly named FSAs, or flexible spending accounts (aka flexible spending arrangements). We’ll also provide some advanced tips on how to make the most of your HSA by using it as a retirement savings tool.
How to Qualify to Contribute to an HSA
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