Health Savings Accounts: What You Need to Know


The government eases the pain of high-deductible health plans by permitting health savings accounts with tax-free savings and spending. Here’s what to know:

Healthcare in America isn’t cheap. Whether from emergencies or chronic conditions, countless Americans face steep medical bills that are hard to reckon with and even harder to pay off. In an attempt to ease these financial burdens, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act into law.

In addition to making sweeping changes to Medicare, this also created a way for Americans to make tax-advantaged savings toward their healthcare expenses. The health savings account, a financial instrument similar to the individual retirement account, allows Americans to better handle high-deductible health plans by permitting tax-free contributions to a dedicated account. If you have the opportunity to open a health savings account, here’s what to know about this important avenue for investment.

Your Account, Your Money
Unlike employer-provided flexible spending accounts (FSA), your health savings account is not tied to your place of work. An HSA belongs to you and will remain in your control even as your employment situation changes. Your contributions and withdrawals combine the best of both IRAs: your contributions are untaxed, as with traditional IRAs, and like a Roth IRA, qualified withdrawals are tax-free as well.

Funds Roll Over
Another important distinction between the HSA and an employer-provided account is that there’s no use-it-or-lose-it proposition here. While unused money in an FSA reverts to the employer at year’s end, the money in your HSA that you don’t spend in a year will carry over to the next year and beyond. Don’t feel pressured to spend money in your account—in fact, by allowing funds to accrue, the right investments will make more money available for any medical bills you may see in retirement.

Opportunity for Self-Direction
The similarities to IRAs are hard to miss. Just as IRAs enjoyed an expansion of creativity with the advent of the self-directed IRA, you can enjoy the gains of a self-directed health savings account. This will allow for alternative investment strategies that grow your health savings for the long term.

Withdraw With Care
There are many benefits available to Americans with health savings accounts. What to know about the drawbacks of spending that money, however, is just as important as the benefits. Simply put, money in your health savings account must go toward healthcare to enjoy the full benefits of the account. While you can withdraw any amount of money at any time, the IRS will both tax and penalize any expenses not pertaining to healthcare. Not only will they tax non-qualifying withdrawals as income, but all such withdrawals will also incur an automatic 20-percent penalty, making even necessary emergency withdrawals costly.

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