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

A health savings account (HSA) is a savings account designed specifically for medical expenses. It is only available to individuals who have a high-deductible health plan (HDHP), which is a health insurance plan with a high annual deductible. HSAs allow you to set aside pre-tax dollars for medical expenses, giving you a way to pay for healthcare expenses while potentially reducing your taxable income.

Here’s how an HSA works:

1. Qualifying for an HSA: In order to be eligible for an HSA, you must have a high-deductible health plan. For 2021, the minimum annual deductible for an HDHP is $1,400 for an individual and $2,800 for a family. In addition, the maximum out-of-pocket expenses for an HDHP cannot exceed $7,000 for an individual and $14,000 for a family.
2. Setting up an HSA: Once you have a qualifying HDHP, you can open an HSA. You can typically do this through a bank, credit union, or insurance company. You will need to provide your personal information and designate a beneficiary for the account.
3. Contributing to an HSA: You can contribute to an HSA on a pre-tax basis through payroll deductions or by making contributions directly to the account. For 2021, the maximum contribution limit for an individual is $3,600 and for a family is $7,200. If you are age 55 or older, you can make an additional “catch-up” contribution of up to $1,000.
4. Using an HSA: You can use funds from your HSA to pay for qualified medical expenses, such as deductibles, copays, and prescriptions. You can also use HSA funds to pay for certain medical expenses that may not be covered by your HDHP, such as dental and vision care.

It’s important to note that if you use HSA funds for non-qualified expenses, you will be subject to taxes and penalties. However, once you reach age 65, you can withdraw funds from your HSA for any reason without penalty (though you will still have to pay taxes on the withdrawn amount if it is not used for qualified medical expenses).

There are a few additional benefits to using an HSA:

1. Tax savings: Contributions to an HSA are tax-deductible, which means they can lower your taxable income. Additionally, earnings on HSA funds are tax-free.
2. Portability: HSAs are portable, meaning you can take them with you if you change jobs or health plans.
3. Investment options: Some HSA providers offer investment options, allowing you to potentially grow your savings over time.
4. Long-term savings: Because you can use HSA funds for any qualified medical expenses, including those in retirement, an HSA can serve as a long-term savings vehicle for healthcare expenses.
   

In conclusion, a health savings account (HSA) is a tax-advantaged savings account designed for individuals with high-deductible health plans. HSAs allow you to set aside pre-tax dollars for medical expenses, potentially lowering your taxable income. With an HSA, you can contribute up to a certain amount each year, and you can use the funds to pay for qualified medical expenses. HSAs also offer tax savings, portability, investment options, and long-term savings potential. If you have a high-deductible health plan, an HSA may be a good way to manage your healthcare expenses while potentially reducing your tax burden.