A Health Savings Account (HSA) provides a way for individuals to set aside money for qualified medical expenses on a pre-tax basis. Beyond its utility in covering healthcare costs, an HSA also functions as a tax-advantaged investment account, allowing funds to grow over time without being subject to taxes.
Contributions to an HSA are tax-deductible, reducing an individual's taxable income. The money in the account can then be used tax-free for qualified medical expenses. This dual benefit of pre-tax contributions and tax-free withdrawals for healthcare costs makes HSAs a valuable financial tool. Furthermore, any investment earnings within an HSA are also tax-deferred, similar to a 401(k) or IRA. Once an individual reaches age 65, funds can be withdrawn for any purpose without penalty, though taxes will be applied if the withdrawals are not for qualified medical expenses.
To be eligible for an HSA, an individual must be enrolled in a high-deductible health plan (HDHP). The IRS sets specific criteria for what constitutes an HDHP, which typically involves a higher deductible amount compared to traditional health insurance plans. The HSA is designed to work in conjunction with these plans, helping individuals manage the potentially higher out-of-pocket costs associated with HDHPs.