Health Savings Accounts Pay Medical Costs and Cut Taxes

Health savings accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses with tax-free dollars.

Intended to be used in conjunction with high-deductible insurance plans, health savings accounts (HSAs) are designed to help pay your medical expenses until your insurance policy begins picking up expenses.

To qualify for a health savings account, a taxpayer must meet two basic requirements:

  1. The taxpayer must have a health insurance plan with a high deductible (defined as not less than $1,350 for an individual and $2,700 for a family).
  2. The taxpayer must be under age 65 when setting up the account.

The accounts can be funded with pre-tax contributions made by employers, tax-deductible contributions made directly by the individual taxpayer, or with rollover funds from certain other accounts.

The big difference between an HSA and other tax-favored medical savings accounts is that the funds in an HSA can be invested, and the earnings grow tax-free. Withdrawals used for medical expenses are not subject to income tax. Also, unlike funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. After age 65, withdrawals can be made and used for any purpose penalty-free but not income tax-free.

While these accounts will not be the best choice for every business or every individual, they certainly should be considered a tax-saving opportunity worth exploring.

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