What is an HSA and how does it work?

A Health Savings Account allows tax-advantaged savings for medical expenses when paired with a high-deductible health plan.

A Health Savings Account, or HSA, is a special type of savings account designed specifically for covering medical expenses. It offers several tax advantages, making it an attractive option for saving money. To open an HSA, you need to be enrolled in a high-deductible health plan (HDHP). This means your health insurance plan requires you to pay a higher amount out of pocket before your insurance starts to cover expenses. The money you deposit into your HSA is tax-deductible, which can help reduce your taxable income. Additionally, the funds in the account can grow tax-free through interest or investments, and you can withdraw money from the account tax-free, provided you spend it on qualified medical expenses. Some common uses include paying for visits to the doctor, prescription medications, and even some over-the-counter drugs. One of the appealing aspects of an HSA is that the money you save rolls over year to year, so you don’t lose your savings if you don’t spend it all in one year.

Imagine Sarah is a 30-year-old graphic designer. She's healthy and doesn't visit the doctor frequently, so she opts for a high-deductible health plan because it has lower monthly premiums. To make the most of her plan, she decides to open a Health Savings Account (HSA). Each month, Sarah contributes a portion of her paycheck to her HSA. Over the year, she saves enough in her HSA that when she needs to buy prescription glasses and pay for her annual physical exam, she uses her HSA funds. This means she spends pre-tax dollars and saves money. Since her expenses were less than the amount she saved, the remaining balance in her HSA rolls over to the next year, continuing to grow.

If you are considering an HSA, first ensure you have or can switch to a high-deductible health plan. Once you've set up your HSA, try to contribute consistently, even if it's a small amount. Over time, these contributions can add up. Use your HSA to pay for eligible medical expenses, and remember, you can grow your savings with tax-free interest or investments. Keep track of all your medical expenses and HSA withdrawals, as this documentation will be important for tax purposes. An HSA is a great tool to save on healthcare costs, but it requires careful planning and consistent contributions to maximize your benefits.