What is a health savings account (HSA) and how does it work?

2 min. readlast update: 07.02.2023

A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals who are enrolled in a high-deductible health plan (HDHP). It is designed to help individuals save and pay for qualified medical expenses.

Here's how an HSA typically works:

  1. Eligibility: To open and contribute to an HSA, you must be covered by a qualified high-deductible health plan. Not all health insurance plans qualify for an HSA, so it's important to check if your plan meets the requirements.
  2. Contributions: You and/or your employer can contribute funds to your HSA. These contributions are tax-deductible, meaning they can be subtracted from your taxable income when filing your taxes. There are annual contribution limits set by the IRS, and the maximum contribution amount is subject to change each year.
  3. Tax Advantages: HSA contributions, earnings, and withdrawals for qualified medical expenses are tax-free. This means you don't pay taxes on the money you contribute to the HSA, and any interest or investment gains within the account are also tax-free.
  4. Account Usage: The funds in your HSA can be used to pay for qualified medical expenses, which generally include a wide range of health-related costs such as doctor visits, prescription medications, hospital fees, dental care, and more. You can use the funds to pay for your own medical expenses, as well as those of your spouse and dependents.
  5. Savings and Investment Options: HSA funds can be saved and rolled over from year to year, unlike Flexible Spending Accounts (FSAs) that typically have a "use it or lose it" rule. Additionally, some HSA providers offer investment options, allowing you to grow your HSA balance through investment returns.
  6. Portability: HSAs are portable, meaning you can take your account with you if you change jobs or health insurance plans. The funds remain available for qualified medical expenses even if you are no longer enrolled in a high-deductible health plan.
  7. Recordkeeping: It's important to keep track of your HSA transactions and receipts for qualified medical expenses. The IRS requires documentation to ensure withdrawals from your HSA are used for eligible purposes.

HSAs provide individuals with a way to save and pay for medical expenses while enjoying tax advantages. However, it's important to review the specific rules and regulations related to HSAs, as they can vary depending on your country and local tax laws. Consulting a financial advisor or tax professional can provide personalized guidance based on your situation.

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