What is an HSA?
A Health Savings Account (HSA) is like a personal savings account, but the money is designated for spending on eligible healthcare expenses. Money deposited in an HSA is not taxed by the federal government, as long as it is used only for those qualified health expenses.
Most people use a health savings account to set aside money to pay for out-of-pocket medical expenses while saving on taxes. Those expenses can include qualified medical, pharmacy, dental, and vision bills. Because the HSA is funded with pre-tax income, you never have to pay income taxes on that money as long as you use it for qualified purchases. Your tax advisor or legal professional can provide guidance if you have questions.
What are the rules for health savings accounts?
To open and use the account, you must be covered under a high-deductible health insurance plan that includes an HSA option. The IRS guidelines for HSA eligibility do not allow the plan to provide for anything other than preventive care before the full deductible has been met.
What is the difference between HSA and FSA?
Health savings accounts and flexible spending accounts (FSA) are both pre-tax accounts that you can use to pay for healthcare-related expenses. However, the main difference is that you own the HSA and the money you’ve deposited in it, while your employer owns the FSA.
The funds in both accounts can be used to pay for qualified medical expenses on a tax-free basis, but if you don’t use all the funds in your FSA before the end of the plan year, you will forfeit them. On the other hand, if you don’t use the funds in your HSA before the end of the plan year, they remain available and continue to grow tax-free in your account. It’s unlikely you’d have to choose between the two accounts, as the one offered is dependent on your employer and health insurance.
If your health plan qualifies for an HSA, it’s worth looking into. The type of account can offer significant tax savings in the short term, and it can serve as a valuable tax-free retirement savings vehicle.
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