The Truth about Health Savings Account

A lot of people find it hard to understand how the health savings account (HSA) can be beneficial to them. Millions of Americans are wary of committing their hard earned dollars into an account that they do not fully comprehend. To appreciate the value of this account, it is good to know its important aspects. These include the advantages, disadvantages, how it works, and who is best suited for this kind of account.

A health savings account is similar to an individual savings account. The main difference is that the money in the account is for covering health care expenses. The individual who holds the account independently makes the decision on how to use the money in the account. The individual also determines how much they want to deposit their account depending on the nature of their health and their financial ability.

In order to open a health savings account, certain conditions must be met. To begin with, you must have a high deductible health insurance policy in order to qualify for a HSA. This is because the money in the account is meant for paying deductible expenses and any other uncovered health costs. Holders of other health policies are not eligible except those with policies such as disability, dental, long term, vision or specific accident. You need to be less than 65 years old before you can open your account. Even if you had account, you cannot make other deposits after you attain 65 years since you are already qualified for Medicare. Finally, you cannot be eligible for a HSA if you have been claimed by someone as a dependent in their tax returns.

The main benefit of a HSA is that money deposited into the account is not taxed. Money withdrawn to cover health expenses from the account is also not taxed. If you do not use all the money you deposited in a year, the remaining amount earns a tax free interest. Another advantage is that you decide on how much to save and are not restricted on how, when or where to use it. Since you own the account, your employer can not claim any of the deposits they made if you decide to change jobs.

Money withdrawn from a health savings account for other expenses is liable to income tax, with an additional 10% penalty. After attaining 65 years, all the money in the account will also be treated as withdrawal for non medical expenses.