What is a Health Savings Account?
A health savings account (HSA) is an account that’s for medical expenses. Money is deposited into and withdrawn from an HSA, just as it is with other accounts. All the money in an HSA, however, is meant to be used for approved medical expenses. If funds are directed to non-medical costs, penalties may be assessed by the IRS.
What Tax Benefits Do HSAs Have?
Using an HSA to pay for medical expenses has two tax benefits. First, contributions are generally either tax-deductible or made with pre-tax income, both of which reduce the account holder’s adjusted gross income and, therefore, their tax burden. Second, any interest or growth that the account generates is untaxed.
What is the Difference Between an HSA and an FSA?
HSAs and flexible spending accounts (FSAs) are both accounts that are used to pay for medical expenses, and they provide similar tax benefits. There are a few key differences between the two types of accounts, though. In general:
- Only individuals who have a high-deductible health plan can participate in HSAs, while an FSAs don’t have this eligibility requirement
- The maximum allowed contributions are typically higher for HSAs than FSAs
- The amount contributed to HSAs can usually be altered throughout the year, but many FSAs only let participants change their contribution amounts during open enrollment
- Balances left in HSAs can often roll over to the following year, but they’re frequently forfeited in FSAs
- HSAs can typically follow employees who change employers, while most FSAs are tied to a specific employer