Health Savings Accounts, or HSAs, are special accounts designed to help those with high-deductible health plans pay their deductible and other out-of-pocket medical expenses. Due to the tax benefits these accounts provide, they help each dollar you spend on eligible expenses go further.
Here’s how it works. If you have part of your paycheck direct deposited into your HSA, then depending on your plan you may not have to pay any taxes on that money. If you contribute to your HSA directly with contributions from your personal bank account, you may qualify for a tax deduction as well. Of course, there are annual limits to these contributions.
In addition to the tax savings on the contributions to your HSA, you don’t pay taxes on the interest earned on the balance either. If you have extra money in your HSA, you may invest it in mutual funds. The money earned on these investments is also not taxed.
The money you put into your HSA is always yours to keep, even if you change jobs, change health plans, or retire. In other words, unlike flexible spending accounts, there is never a “use it or lose it” rule with HSAs.
What types of eligible expenses are allowed with HSAs? Most typical healthcare expenses for you and your family, such as laboratory fees, doctors, dentists, and prescription medications are eligible.
There are some items that cannot be purchased with funds from your HSA. Things such as cosmetic procedures, gym memberships, and medications or supplements not prescribed by your doctor cannot be paid with HSA funds.
How do you access funds in your HSA? Most HSAs make it very convenient, offering several payment options, such as a debit card, paper checks, or electronic payments from the HSA website.
In summary, HSAs offer several levels of tax savings, increasing your spending power, and ultimately helping to pay out-of-pocket expenses on high-deductible savings plans.