What is it?
A Health Savings Account (HSA) is an account that you can fund for medical expenses when you are enrolled in a high deductible health plan. This can be a great tool to pay for medical expenses tax free. A high deductible health plan has certain parameters to meet in order to qualify. If you are a healthy individual and rarely go to the doctor, this is a great savings tool for you. With a high deductible health plan, your monthly premiums are usually less. You can then take your premium savings and contribute to your HSA. For 2021, the maximum contribution is $3600 for an individual and $7200 for family coverage. In 2022, the maximums are going up to $3650 and $7300. Your contributions are tax deductible. Unlike the Flex Spending Account (FSA), you do not have to use the money in the account. You can let it grow.
How can you use it?
Any qualified withdrawals from your HSA are tax free. Qualified withdrawals are withdrawals used for medical expenses. The companies that sponsor HSA accounts make it easy for you and give you a debit card to use.
If you do not use the money for medical expenses and you are under age 65, then you will have a 20% penalty AND must pay taxes on the withdrawal at your ordinary income rate.
If you save the money (invest and grow), you can take the money out penalty free when you are 65. You will still have to pay tax on the money at that time if it is not used for medical expenses. At age 65, you will likely have some medical expenses and you could have a nice account that you can use specifically for those out-of-pocket medical expenses.
Having an HSA account is a great way to pay for your out-of-pocket medical expenses tax free.