What are Health Savings Accounts (HSAs)?

In 2003, the Bush administration passed the Medicare Prescription Drug, Improvement, and Modernization Act which gave rise to health savings accounts. A health savings account (HSA) is an IRA-like account funded with pretax dollars that grow tax-deferred. The HSA assets may serve a dual purpose:

What is an HSA? tax-free and penalty-free distributions can be taken to pay for medical expenses, and
What is an HSA? penalty-free (but not tax-free) distributions can be taken for any reason starting at age 65.

In other words, HSA assets not used for medical expenses become retirement assets.

To open an HSA, you need to have a current high-deductible health plan (HDHP). You can then make deposits into your HSA on a pretax basis through your employer. If you make deposits outside of your current employer, the contribution is post-tax, and you can use it to decrease gross taxable income on the following year's income tax form. The IRS has year-to-year limits to the tax-free amount you can deposit into your HSA. Any money you deposit above these limits is not tax-deductible.

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