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What is a Health Savings Account and Should You Have One?

A Health Savings Account (HSA) is method of saving funds for medical expenses. Holders of this type of account deposit funds into the HSA and are then able to withdraw them as needed to pay for medical expenses. The funds that they deposit are not subject to federal income tax at the time of deposit. Withdrawals are also not taxable as long as the account holder uses the funds for qualifying medical expenses. The contributed funds roll over for year to year, which means that if the account holder does not spend the entirety of his or her balance, the funds will remain in the account to be used in the future.

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In order to open an HSA, an account holder must also have an insurance policy referred to as a high deductible health plan (HDHP). An HDHP has a high deductible, but lower premium payments. The HDHP and the HSA work in conjunction with each other to cover the account holder’s medical expenses.

Deposits are made into HSAs by individual account holders or by their employers. These deposits are typically made on a pre-tax basis. However, if an employer contributes to an HSA, then the deposit may be subject to federal taxes. HSAs have maximum annual contribution limits set by Congress. As of 2017 the limit for HSA contributions is $3,400 for a single account and $6,750 for a family account. Account holders over the age of 55 are permitted to contribute an additional $1,000 per year, as a means of allowing them to “catch up”.

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Some HSAs include an investment component that allows the holder to invest a certain amount of the account’s funds. This is beneficial because these funds grow on a tax-free basis, allowing the account to build up over time. Upon withdrawal, as long as the account holder uses the funds for qualifying medical expenses, these funds remain tax free. This means that HSA holders could benefit tax-wise three times over: when depositing, withdrawing, and growing funds in their accounts.

Account holders do not need approval to withdraw funds from their HSAs. As soon as funds are deposited into an HSA, they immediately belong to the account holder, regardless of who made the deposit into the account. Account holders may use the funds in these accounts for any purpose, however if they do not use the funds for a qualifying medical expense, they must pay taxes on what they have withdrawn and are also subject to a 20 percent tax penalty. If the account holder is over the age of 65 or is disabled at the time of withdrawal, then he or she is not subject to the 20 percent tax penalty. However, he or she is still required to pay taxes on the withdrawal. The IRS provides a list of qualifying medical expenses that HSA holders should be aware of so as to ensure that their withdrawals will not be taxable.

There are several methods for an account holder to use his or her HSA to pay for medical expenses. Some accounts provide a debit card or checks for the account. Other HSAs have a process for reimbursing users, similar to typical medical insurance plans. Account holders must retain all documents related to their medical expenses so as to prove that they spent the funds in accordance with the requirements of their plan. If account holders do not retain proper documentation, they could be subject to taxation of their withdrawals.

Proponents of HSAs argue that account holders who have more control over their medical expenses are more likely to seek out low cost medical care in addition to being more watchful for fraudulent and wasteful healthcare spending. These account holders are far more aware of the cost of their medical care, which means that they are less likely to waste funds on unnecessary medical procedures. However, critics state that this creates an inherent problem with HSAs because account holders may delay or avoid seeking treatment for medical conditions due to lack of funds or a desire to save existing funds for future needs. This seems to demonstrate that HSAs are extremely beneficial for account holders who are younger and healthier, with far fewer benefits for account holders who are older or have chronic medical conditions.

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