What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is specifically designed to allow individuals to save money for qualified medical expenses on a tax-free basis. The key feature of an HSA is that it can be funded by multiple sources, including contributions from employees, employers, or even both. This flexibility in funding is what distinguishes an HSA from other types of accounts.

HSAs offer several tax advantages: the contributions made are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. This makes HSAs highly beneficial for individuals who want to manage their healthcare costs while enjoying tax benefits. Additionally, the funds in an HSA roll over from year to year, unlike some flexible spending accounts, allowing for long-term saving.

In contrast, tax implications vary for the other options. For instance, options that describe HSAs as solely funded by employers or restricted to non-eligible medical expenses do not capture the full functionality and purpose of an HSA. Describing HSAs as accounts only usable during retirement for healthcare costs also overlooks their broader application during one’s working years for a variety of eligible medical expenses.