A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if not spent.
HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans.
HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty. However, beginning in early 2011 OTC (over the counter) medications cannot be paid with HSA dollars without a doctor’s prescription. Withdrawals for non-medical expenses are treated very similarly to those in an IRA in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. These accounts are a component of consumer driven health care.
Benefits of an HSA Account
Reduce Health Insurance Premiums
By establishing a high deductible plan which protects against catastrophic loss, the participants can cut their premiums by as much as 40-50 percent over a traditional group or “doctor co-pay” plan. Most people never recover those premiums they pay for these first dollar expenses.
Reduce Federal Income Taxes
Contributions to an HSA up to $6,150 for a family and $3,050 for an individual can be deducted from federal taxable income. Contributions are not subject to withholding, estimated taxes or other employment taxes such as FICA.
Earn Interest Tax Free
All interest, dividends, and capital gains earned in a Health Savings Account are tax deferred and when used for qualified medical expenses are tax-free. And since any unused funds roll over to the next year, as your account grows, additional self-directed options such as mutual fund investments are available.
Can Be Used As A Second Retirement Account
Money remaining in an HSA after age 65 can be used for anything (even non-medical expenses) and withdrawals are treated just like an IRA. Money left in the account continues to accrue earnings on a tax-deferred basis. Prior to age 65 funds withdrawn for non-medical expenses are subject to a 10% penalty.
Pay For Expanded Medical Services
Pre-tax dollars can be used to pay for medical services not covered by traditional health plans. Some examples are laser eye surgery, dental, eyeglasses, acupuncture, children’s braces, long term care premiums, and more.
Self-Directed Investing Meets Health-Care
If lowered premiums and greater health-care flexibility weren’t enough, you can invest the funds within that account as you see fit. Just like your IRA, your HSA can also be truly self-directed.
This means there is a wide array of alternative assets available to help grow your account. You don’t have to be restricted to the plain vanilla bonds and CDs offered by most HSA custodians. You can use your knowledge and expertise to make sure that every HSA dollar grows to its full potential.
With the proper tending, a self-directed HSA can ensure that you never have to worry about how you’ll pay for your medical expenses.
With so much uncertainty surrounding health-care benefits now and into the future, the HSA is a more valuable tool than ever before. You have the chance to truly take control your health-care spending. No need to sit around and wait for Congress to act. You already have the tools you need at your fingertips.
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