One of my favorite tax-advantaged accounts is a health savings account, or HSA, for short. Not only does an HSA allow you to pay for a wide variety of healthcare expenses with pre-tax dollars, but you can spend it any way you want after your 65th birthday. It's a clever, legal way to pay less tax, save more, and invest for the future.
All that said, having an HSA comes with strict rules you must follow or pay a hefty penalty. This post will cover terrific tax benefits you get from an HSA, updates on new (and often surprising) allowable expenses, and tips for using an HSA to build wealth for retirement.
What is a health savings account (HSA)?
An HSA is a tax-free account for the sole purpose of paying allowable healthcare expenses. But to qualify, you must have a particular type of health insurance, which I'll cover in a moment (see "Who qualifies for an HSA?" below).
You can contribute to an HSA if you purchase an HSA-eligible health plan on your own or through an employer's group plan. You always own and manage an HSA as an individual, and there are no income limits to qualify.
In other words, you don't need permission from an employer or the IRS to set up an HSA, and it stays with you if you change jobs or become unemployed. Even if you lose your HSA-eligible insurance, you can continue spending your HSA balance, but you're not eligible to make any new contributions to the account.
The beauty of an HSA is that contributions are deductible on your tax return even if you don't itemize deductions. The funds can earn interest, or you can invest some or all of them for potential growth in a menu of options, such as mutual funds. The investment options depend on your HSA provider, so it makes sense to shop around before setting up an HSA. Then, when you take distributions to pay for qualified medical expenses, your original contributions plus any earnings are entirely tax-free.
Depending on your income tax rate, using an HSA to pay for allowable...
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