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A health savings account offers a way to save while paying for healthcare expenses.

To be eligible for an HSA, you must enroll in a high-deductible health plan, or HDHP. These plans have high deductibles, but their monthly premiums are lower than plans with lower deductibles. They are intended to cover serious illness or injury.

To open and contribute to an HSA, you must be covered under a HDHP on the first day of the month, you cannot be covered by a non-HDHP plan or enrolled in Medicare, and no one can claim you as a dependent on a tax return.

Among their many advantages, HSAs:

  1. Permit others to contribute to your HSA
  2. Allow pre-tax and tax-deductible contributions
  3. Allow tax-free withdrawals
  4. Let funds roll over to the next year
  5. Offer portability if you change plans or retire 

Their disadvantages include:

  1. High deductibles
  2. Money can only be used for qualified healthcare expenses
  3. Unexpected healthcare costs might exceed what’s saved in the HSA
  4. The pressure to save
  5. Taxes and penalties on withdrawals for non-qualified expenses before 65
  6. Recordkeeping requirements
  7. Fees

There are hundreds of health expenses that qualify for payment from an HSA. Examples include chiropractic or dental treatments, fertility services, wheelchairs and prescription medications.

Contributions to an HSA can be made any time during the calendar year and up to April 15 of the following tax year. The IRS sets contribution limits.

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