6 Important Health Savings Account Advantages

Health savings accounts provide significant tax advantages and allow you to save and invest for health care expenses. These accounts are coupled with high deductible health plans, also called major medical, which are common on the individual insurance market and offered by some employers, particularly small businesses. High deductible plans with health savings accounts keep the costs of providing health insurance benefits to employees down, while providing tax and other advantage to health care consumers.

Tax-Deductible Personal Contributions

Contributions you make to an HSA using after-tax income (take-home pay) are an above-the-line tax deduction, reducing your taxable income. Contributing the maximum allowable amount each year can potentially reduce your tax by several hundred dollars, while allowing you to build up a nest egg for medical expenses.

Pre-Tax and Tax-Deductible Employer Contributions

If your HSA is through your employer, you may be able to take advantage of a Section 125 plan. Also known as salary reduction plans, this contributes pre-tax income to your HSA. As pre-tax income, these contributions are excluded from the wage and salary amount used to calculate your FICA and income taxes. Salary reduction plan contributions aren’t eligible for the above-the-line deduction, although employer contributions outside of a Salary Reduction Plan are not included as income for tax purposes.

Health Savings Accounts Have Flexible Investment Options

Health savings accounts can be set up as simple savings accounts, with or without check-writing privileges or debit cards. You can also invest your HSA funds like a 401(k), potentially growing the investment beyond the maximum allowable annual contributions.

Health Savings Account Funds Roll Over Year to Year

Health savings accounts are not use it or lose it like flex spending and health reimbursement accounts. HSA contributions roll over from one year to the next. If you die, the HSA can be passed to a beneficiary like any other asset.

Health Savings Accounts Move with You

A health savings account is an account in your name, and it follows the rules of any other account in your name. Even if the HSA is in conjunction with a high deductible health plan offered by your employer, you keep the account if you leave that employer. If you are laid off, you can even use the HSA to pay COBRA premiums.

Health Saving Accounts Pay for Expenses Insurance Doesn’t, Tax-Free

As long as the disbursements are used for qualified medical expenses, the funds that went into the account tax-free are not taxed when you withdraw them, either.

You can use health savings account funds for any qualified medical expenses, including those not typically covered by insurance, such as over-the-counter medicines, certain alternative therapies, adult orthodontic work and eyeglasses. Although HSAs are connected to high deductible health plans, the funds can be used for expenses excluded from coverage, including birth control, prescription drugs, co-pays and the deductible.

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