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Health savings accounts are designed to lower health care costs and reduce health care spending. But they also provide considerable tax and investment benefits. Tax-free contributions, investment growth and distributions, plus the ability to invest the balance in a variety of opportunities, combine to make the benefits of HSA's unmatched in recent memory.
Tax and Investment Benefits of Health Savings Accounts
Health savings accounts (HSAs) provide a new and ever-more-popular way to save money for health care expenses. In essence, a health savings account allows you to save tax-free money for current and future health expenses, and gives you control over how the money is invested. An HSA (which is available only to taxpayers in the United States) is an option that provides significant tax and investment benefits.
Health savings accounts have at least three tax benefits. First of all, voluntary contributions you make to your HSA are tax-deductible on your federal tax return and on many state tax returns. There is a limit--the maximum deductible annual contribution was $2,250 for an individual plan and $4,500 for family plans. The limit is adjusted upward every year, so make sure to find out what the current numbers are.
IYou might be wondering if contributions to your HSA can show up as a pre-tax deduction on your paycheck. In most cases, no. You'll have to handle your own contributions after receiving your paycheck. You have until April 15th to make contributions for the previous year. Keep records so you can claim the amounts as deductions on your next return. Good news, though--you don't have to itemize to claim a deduction for your HSA contributions.
Another tax benefit is that all the interest earned by the money in your HSA is tax-free. Whether you accept a fixed interest rate like a traditional savings account or choose to invest your HSA balance for potentially higher returns, none of the investment growth of a health savings account is taxed.
Finally, the money that you take out (or distribute) from your health savings account is tax-free as well, provided that you use the withdrawal to pay for qualified medical expenses. This makes the tax benefits of an HSA greater than even the more familiar IRA (individual retirement account).
Health savings accounts offer significant investment benefits too. If you qualify for an HSA, you can set it up as easily as an investment or retirement account. Any insurance company, bank or other financial institution (like brokerages or mutual fund companies) can be an HSA custodian or trustee. You don't have to open your HSA with the same company that provides your health insurance plan.
For those who prefer not to take an active role in managing their HSA, the balance can be placed in an interest-bearing savings account. Others might want to take advantage of mutual funds or similar investment options for their health savings account. You're even allowed to hold multiple accounts if you wish, but you're still held to a single limit on tax-deductible contributions.
If you don't use up the funds in your HSA, the balance can be "rolled-over" to the next year. There is no maximum limit on how large your health savings account can become, other than the annual contribution limits.
One of the greatest overall benefits of health savings accounts is the control that it gives the health care consumer. You can use the funds in your HSA to pay for current medical expenses or future needs. You control which company holds your account, how much money is contributed each year, which medical expenses are paid using the account, whether or not the funds are invested, and which investments are made. And you can keep your health savings account even if you change medical coverage later, change your job or lose your job.
Health savings accounts may not be perfect for everyone's lifestyle or state of health. But if an HSA is compatible with your situation, you'll find that its tax and investment benefits are superior to any other type of medical savings plan offered before.
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