Health Savings Account (HSA): How HSAs Work, Contribution Rules

A Health Savings Account (HSA) is a tax-advantaged account for individuals with high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions are limited annually and can be made by the individual or employer. HSAs are tax-free for contributions, earnings, and distributions used for medical expenses. Eligibility criteria include having an HDHP, no other health coverage, not being on Medicare, and not being a dependent. Withdrawals for non-qualified expenses incur taxes and penalties. Investment options are available in HSAs, but maintaining an HDHP is essential. Qualified medical expenses include deductibles, prescriptions, dental care, and more, but not insurance premiums. Unused contributions roll over annually, and HSAs are portable. Some drawbacks include high deductibles and regulatory filing requirements. FSAs, in contrast, are employer-specific and lack rollover options. HSA contributions can roll over, be invested, and provide tax advantages for medical expenses in the U.S. They are considered triple tax-advantaged due to tax benefits on contributions, earnings, and withdrawals for qualified medical expenses. Starting an HSA early and allowing it to accumulate over time can be beneficial for future financial needs, especially with increasing medical expenses in older age.