Health Savings Account

Health Savings Account

A form of health insurance in which a policyholder makes tax-free contributions to a special account that can be used for present and future medical expenses. Health savings accounts may be purchased individually or through an employer, but, in order to qualify for one, a policyholder must have an insurance policy with a high deductible. A health savings account may be used in order to offset the high deductible on one's other insurance policy. One does not pay taxes on withdrawals from a health savings account, unless one withdraws funds for a non-medical reason, in which case there may also be a penalty, depending on the age of the policyholder.

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Health savings account (HSA). A health savings account is designed to accumulate tax-free assets to pay current and future healthcare expenses. To open an HSA, you must have a qualifying high deductible health plan (HDHP) either through your employer or as an individual.

If you have an employer's plan, your contributions to the HSA are made with pretax income, and your employer may contribute as well. If you have an individual plan, you may deduct your contributions in calculating your adjusted gross income (AGI).

Congress sets an annual limit on the amount you can contribute to an HSA, which you set up with a financial institution such as a bank, brokerage firm, insurance company, or mutual fund company that offers these accounts.

No tax is due on money you withdraw from the HSA to pay qualified medical expenses such as doctor's visits, hospital care, eyeglasses, dental care, and medications for yourself, your spouse, and your dependants.

Any money that's left over in your HSA at the end of the year is rolled over and continues to accumulate tax-free earnings, which you can use for future healthcare costs.

Once you're 65, you can use the money in the HSA for non-medical expenses without paying a penalty, but you'll owe income taxes on those withdrawals. If you are younger than 65, you can also spend from your HSA on non-medical expenses, but you'll owe income taxes plus a 10% tax penalty on the amount you take out.