HSA

The Health Savings Account (HSA) is a tax-advantaged savings vehicle in the United States designed for individuals enrolled in a high-deductible health plan (HDHP) to save for medical expenses. Funds in an HSA can roll over from year to year and may be invested, potentially growing tax-free.

Eligibility for an HSA requires enrollment in an HDHP, not being enrolled in Medicare, and not being claimed as a dependent on another person’s tax return. The account is owned by the individual and remains portable when changing jobs or insurance plans.

Tax treatment and contributions are key features. Contributions may be tax-deductible or payroll-deducted pre-tax, subject to annual IRS limits. Earnings grow tax-free, and withdrawals used for qualified medical expenses are tax-free.

Qualified medical expenses cover a broad range of healthcare costs, including deductibles, copayments, prescriptions, and many dental and vision expenses. Some over-the-counter items and other health costs can also qualify, depending on IRS rules. Many HSAs offer investment options, enabling account holders to invest funds in mutual funds or other vehicles for potential growth, subject to provider rules and fees.

Distributions from an HSA are tax-free when used for qualified medical expenses. Non-qualified withdrawals are taxed as ordinary income and typically incur a 20% penalty if taken before age 65. After age 65, non-qualified withdrawals are taxed but the 20% penalty is waived.

Balances in an HSA carry forward indefinitely and are portable with the account holder, making the HSA a potential supplementary retirement resource for medical costs. Annual contribution limits are set by the IRS and may change over time.