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A health savings account (HSA) is a personal savings account that lets you set aside pre-tax funds at any point in the year for medical expenses, including those not covered by your plan. Sometimes health savings accounts are offered by employers.
There are a few great things about the HSA:
- Expenses paid with funds from your HSA count toward your deductible.
- The funds in the account accrue interest.
- If you have funds left over in the account at the end of the year they can “roll over” and be used the following year. (However, distributions from HSAs that are not used for qualified medical expenses are subject to an additional 20% tax, on top of ordinary income tax. But if you switch plans mid-year, your funds come with you to your new employer, assuming the newbie has a plan.)
To be eligible for a health savings account, you must have a high-deductible health insurance plan, not be covered by any other health insurance plan (including Medicare), and cannot be a dependent on someone else’s tax return.
Health savings accounts (or HSAs) are a fairly new wrinkle in the nation's health care arsenal. If you select a health insurance plan that has a high deductible (say, $1,000 or more, instead of the usual $250 or $500) that you have to pay out of your pocket before coverage kicks in, you can open a health savings account to pay for those medical costs—and to also save money for future medical expenses. (Yes, you can use it only for health care expenses, so the Aruba trip may not cut it.)
The government doesn't tax the contributions or the interest in this savings account, so the cash can build quickly. Best of all, you can't lose the account. Regardless of whether you purchased the high-deductible health insurance plan through your employer or a private health insurance policy on your own, your health savings account remains yours and yours alone. You can even keep it if you move to another state. And it doesn't have the infamous catch that comes with other types of medical spending accounts; you don't forfeit unused HSA funds at the end of the year or in the following spring.
Important: This content reflects information from various individuals and organizations and may offer alternative or opposing points of view. It should not be used for medical advice, diagnosis or treatment. As always, you should consult with your healthcare provider about your specific health needs.