A Health Savings Account (HSA) is an easy way to save and pay for qualified current and future medical expenses. People often confuse Health Savings Accounts and Flexible Savings Accounts, but they are not the same. For one thing, the funds roll from year to year and move with you if you change jobs, become unemployed or change medical coverage.
What is an HSA?
It’s a special tax-advantaged account for individuals with High Deductible Health Insurance Plans (HDHP).
How do they work?
You, your employer or both can make pre-tax contributions, up to an annual contribution limit. As you incur medical and health-related expenses, like insurance co-pays and prescriptions or long-term care services, you can use the funds in your HSA to cover those costs. A complete list of qualifying expenses is available at IRS.gov (Publication 969).
What are some other benefits?
Even if you do not expect to have medical expenses during the year, consider a Health Savings Account if you’re eligible. From the moment you open it, even if your balance is zero, any medical expenses you incur will qualify for tax-free reimbursement when the expense happens.
So, say your HSA balance is zero, but you have to go to a doctor and incur a $75 bill. Just add the funds to your HSA and reimburse yourself so you can get the tax break on that bill.
Also, having an HSA in place now is a great (but unconventional) way to save for expenses during your retirement. You’re likely to have higher medical costs and less income to pay for them at that time. One of the great benefits of HSAs is that the funds carry forward from year to year and can always be used to pay for qualified health care expenses tax-free.
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