Health Savings Accounts

With a health savings account (HSA), you can defer pretax income, up to an annual limit, to the account and use the money to pay for qualified medical expenses, including prescription drugs.

The expenses you cover actually cost less because no tax is due on the money you’re using to pay for them. Plus, any unspent balance can be rolled over year after year, so you never lose the amount you’ve put in. You also have the right to move the account if you change jobs.

However, there’s a catch. You can open an HSA only if you’re enrolled in a high-deductible health plan (HDHP). If your employer doesn’t offer one, or if you decide some other plan is a better value, you’re out of luck with an HSA.

What’s more, if you dip into your HSA for nonqualified expenses, you’ll owe income tax on the amount you withdraw plus a 10% tax penalty if you’re younger than 65.

 

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