What is a health savings account?

If asking "what is a health savings account," you should know a health savings account (HSA) brings together a tax-favored savings account with high deductible health insurance. A health savings account (HSA) is a tax-favored savings account created for the purpose of paying medical expenses. Money in the savings account goes towards the deductible. Once you meet the deductible, the insurance will start being paid. Money sitting in the savings account accrues interest.

How an HSA works

You choose every year the amount to put in your HSA account, but you may not go over the maximums of $3,400 for an individual ($3,350 in 2016) and $6,750 for a family (also $6,750 in 2016) for 2017, as mandated by the government. Adults over 55 may put in up to an additional $1,000. If your HSA is from your place of work, you can use simple automated contributions that come straight from the payroll. You will get a checks or a debit car connected to your HSA available balance and you can use the money on medical costs that are eligible. This includes coinsurance and copays, deductibles, and different medical costs considered qualified by not covered by your plan.


An HSA balance rolls over from year to year, unlike a Flexible Spending Account. If you are older than 65 and participating in the Medicare program, you may no longer put money into an HSA. However you may still utilize the money for medical costs you'd pay out of your own pocket. If the money is used on expenses that aren't eligible, you must pay income tax on that cost (in addition to a fee if you're younger than 65).

Investment potential for HSA's

There are also no minimum required distributions at 70½ like other retirement accounts. HSA's can be invested in mutual funds, stocks and other investment tools. Avoid companies that charge fees or require a minimum balance for investing if you are investing your HSA balance.

Qualifying for an HSA

If you're healthy overall and are considering saving for health care costs in the future or are retiring soon an HSA might be a good option. Being enrolled in a high high-deductible health insurance plan (HDHP) lets you qualify to open an HSA. You may open an HSA through your employer or on your own through your bank if you are under 65 and carry a high-deductible health insurance plan.

According to the IRS in 2017, high-deductible plans are ones where the out-of-pocket expenses max out at $6,550 and a minimum deductible of $1,300. For a family plan in 2017, the out-of-pocket maximum is $13,100 and the minimum deductible is $2,600.

If you have a spouse and they use your insurance for backup coverage, he or she also must be enrolled in a high-deductible plan. This high-deductible health plan must be your only health insurance.

HSA Advantages

Any contribution you make to an HSA is completely deductible, just like an IRA. Withdrawals to pay for qualified medical expenses like dental and vision are not taxed. Also, any interested you earn is tax-deferred. You can decide how much money to set aside for health care costs and can shop around for care of your choice. Your money remains in your account even if you change jobs. When you put money into your HSA you reduce your taxable income. The money you keep in your HSA earns interest tax-free. The money you take out to pay for eligible health care expenses is never taxed.

Disadvantages of an HSA

The potential disadvantages of HSA are that it can be hard to accurately predict how much you will have to spend on your health care. Illness can be unpredictable and information about the quality and cost of medical care could be hard to find. It can be challenging to put aside money for an HSA. Older people who have health that is not good may not be able to save as much as healthier, younger people. Pressure to save the money in your HSA might deter you from seeking medical care when you are not sure you need it, in the interest of keeping money in the account. Taking money from your HSA for costs that aren't medical requires that taxes are paid on those expenses.

An HSA can help you save for health care expenses. Any money you put into the account is not taxed and rolls over from year to year. You can create one through an employer or on your own, and can use it without penalty until you are 65. Money taken out for medical expenses is not taxed.

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