Find out what a health savings account (HSA) is, who can have one, and how to make distributions the right way.
A long-time Money Girl podcast listener, who also happens to be my husband, asked me:
In this episode I’ll answer my dear husband’s question, tell you what a health savings account (HSA) is, who can have one, and how to make distributions the right way.
What Is a Health Savings Account (HSA)?
An HSA is a tax-exempt account that you can use to pay or reimburse yourself for certain medical expenses, like visits to the doctor or dentist, prescription drugs, and eyeglasses. But there's no time limit or requirement to spend the money because it simply rolls over from year to year, with no penalty.
You can fund an HSA, up to certain annual limits, using your own contributions, funds from a family member, or contributions from an employer. Deductions are made either on a pre-tax basis or can be deducted on your tax return, even if you don’t itemize deductions.
That means you never pay tax on money that goes into your HSA, which is a nice savings. Plus, you also get another tax break because the money in an HSA grows tax-deferred.
However, if you spend any amount of HSA funds on non-qualified expenses, like groceries or a trip to Maui, you could wind up having to pay ordinary income tax, plus a 20% penalty on those distributions.
If you spend any amount of HSA funds on non-qualified expenses, like groceries or a trip to Maui, you could wind up having to pay ordinary income tax, plus a 20% penalty on those distributions.
Who Qualifies for a Health Savings Account (HSA)
But, unfortunately, not everyone qualifies for an HSA. To be eligible to open up and contribute to an HSA, you must already be covered by a high deductible health plan or HDHP. No matter if you get an HDHP on your own or through a employer, you're still eligible for an HSA.
These policies aren't different from regular health insurance policies, except that they have unusually high deductibles. That means you have to pay more out of pocket before your benefits begin. Because you're responsible for more of your medical expenses, a HDHP typically costs less than a traditional low-deductible plan.
See Also: The Benefits of Health Savings Accounts