A Health Savings Account (HSA) is a bank savings account in which you can save money for qualified healthcare expenses. To be eligible to open one, you must be enrolled in a qualifying high-deductible health insurance plan (usually indicated in the plan name by being marked as "with HSA"). HSAs are a spectacular tool for saving money towards your medical expenses. Just why are they so great? Here are just a few reasons:
- You can deposit money pre-tax. If it’s not pre-tax money, then it’s tax deductible when you file your taxes. Any money you’ve deposited into the account but haven’t spent automatically gets rolled over year after year: it's yours to keep. This account is a great tool for saving up to the deductible over an extended period of time.
- The account can grow with interest. You can invest the money in the account, just like a 401K, and all earnings are tax free.
- Withdrawals for qualified healthcare expenses are tax free. However, be aware that if you withdraw funds for non-qualified expenses, you pay tax on that money and get hit with an additional penalty of 20%.
So what are qualified healthcare expenses? They include doctors’ visits, prescriptions, dental treatment and more. The list is enormous, much too long to include here, but look for the IRS publication 502 on their website for a complete list.
Other info you should know…
The IRS sets a limit as to how much money you can deposit annually. For example, in 2010 the limit was $3050 for an individual. Just be sure not to go over!
You get to keep the account and use it, even if you switch plans. However, if you switch to a non-qualified health insurance plan, you won’t be able to deposit more money into it. You can, however, still withdraw funds to pay for healthcare expenses.
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