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What are Health Savings Accounts and How Should They Be Used?


A Health Savings Account (HSA) gives people an efficient way for covered individuals to pay out-of-pocket health insurance expenses. The key benefit of an HSA is that it provides triple tax savings.  The money you put into an HSA is tax deductible, thus reducing your taxable income.  The HSA grows tax free and you can withdraw the HSA funds to pay for medical expenses all without paying taxes. Many consider it to be one of the most efficient ways to save, regardless of whether a person is saving for a catastrophe or their long-term future. It can be helpful to learn more about how HSAs are commonly used to see if this option is right for you.

Reducing Your Taxable Income 

Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make a year. It helps you maximize your income while simultaneously safeguarding against emergency health situations. Individuals who contribute $3,000 to their HSA a year will be taxed as though they make $3,000 less than their standard income. The money you contribute to your HSA will roll over from year to year, which means the insured can grow their emergency funds over time. While these funds typically can't be used to pay for insurance premiums, they can be used to pay for co-pays, deductibles, and other eligible non-covered expenses. 

Maximum Restrictions 

The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the current maximum is $3,450 and $6,900 for a family. Adults over the age of 55 are allowed to contribute an extra $1,000 or more. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family are allowed to contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well. 

How to Use It 

Some people use their HSA as a straight savings account while others choose to invest the money in mutual funds and stocks. In fact, the HSA may be an equal or better financial move than investing in a typical retirement account. Unlike IRAs, there are no required minimum distribution requirements on HSAs.  In addition after age 65, HSA dollars can be withdrawn without penalty when not used solely on medical expenses, though it will be taxed as income. The HSA has similar features to an IRA, but with more perks.  

An HSA can be helpful for anyone who hopes to be able to pay their health insurance expenses immediately. They may be more commonly chosen by those with high deductibles, but the truth is that practically anyone can benefit from the tax-free incentives if they so choose. 


This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.