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What Is an HSA?

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A Health Savings Account, or HSA, is a handy way to save for medical expenses and reduce your taxable income. But not everyone can — or should — sign up for the kind of health insurance plan required to open an HSA. Read on to learn more about how HSAs work and how they can benefit you.

Qualifying for an HSA

If you are enrolled in a high-deductible health insurance plan (HDHP) as defined by the government, you can qualify for an HSA. These plans are re-defined each year by the IRS, which determines the minimum deductible they must have and the maximum amount a planholder can spend out-of-pocket. You can find those current amounts on,but bear in mind some plans have high deductibles but don’t qualify you for an HSA. Look for plans specifically tagged “HSA-eligible” if you want the account option.

How an HSA works

Some employers that offer high-deductible health plans also offer HSAs. If yours doesn’t, you can open a separate HSA account as long as you have a qualifying plan.

Each year, you decide how much to contribute to your HSA account, though you cannot exceed government-mandated maximums. If you have an HSA through your workplace, you can set up easy automatic contributions directly from payroll.

You will receive a debit card or checks linked to your HSA balance, and you can use the funds on eligible medical expenses. This includes deductibles, copays and coinsurance, plus other qualified medical expenses not covered by your plan. Be aware that insurance premiums usually cannot be paid for with HSA funds.

Unlike a Flexible Spending Account, your HSA balance rolls over from year to year, so you never have to worry about losing your savings. Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket medical expenses. If you use the money on non-eligible expenses, you have to pay income tax on that amount (plus a penalty if you’re under 65).

HSAs have 3 tax advantages

One of the primary benefits of HSAs is that they have three tax advantages. HSA contributions are either pre-tax (if through an employer) or tax-deductible (if you opened your own), you don’t pay taxes on the account’s growth, and if you make withdrawals for eligible expenses, you don’t pay tax on those withdrawals either.

Because HSA contributions,don’t count toward your tax burden, you will be taxed as though you make less money. Say, for example, you make $40,000 per year. If you put $3,000 in your HSA, you will be taxed as though you make $37,000, thus lowering your tax burden.

Investment potential for HSAs

Another benefit of HSAs is that the money can be invested in mutual funds, stocks and other investment tools. Different companies can help you do this, depending on your investing preferences.

If you plan to invest your HSA balance, find an HSA custodian that allows investing and offers low-fee investment options. And be sure to consult a fee-only financial advisor.