Health Savings Accounts, which allow individuals with high-deductible health plans to save money for medical expenses, offer significant tax advantages. In fact, according to the U.S. Department of the Treasury, an HSA can provide triple tax savings: tax deductions when you contribute, tax-free interest and tax-free withdrawals. Unlike similar accounts (e.g., health reimbursement arrangement and flexible spending accounts), an HSA belongs to the account owner. If you have an HSA, the money in it is yours.
Contribute Tax Free
You can deduct from your gross income money you put into an HSA. Employers are not considered taxable income either, according to the Treasury Department. Treasury regulations limit the amount you can deposit in your HSA each year. In 2010, the contribution limit is $3,050 for a person with individual coverage and $6,150 for family coverage. The Treasury Department makes an exception for those approaching retirement. If you are 55 years old or older, you can save an extra $1,000 a year until you enroll in Medicare.
Tax-Free Withdrawals
You can make tax-free withdrawals from the HSA---usually via check or debit card---to pay for medical expenses, or you can reimburse yourself for those costs. Those expenses must be considered "qualified medical expenses," however, according to Treasury regulations. (Most medical costs qualify; a detailed list is available in IRS Publication 502.) Even if you become ineligible to contribute to your HSA---for instance, you are no longer enrolled in a high-deductible health plan---you can still use HSA funds for qualified medical expenses.
Tax-Free Interest
As with an IRA, an HSA can grow through investment earnings, according to the Treasury Department. Unspent funds accumulate and the interest isn't taxable.
No Income Cap
Unlike many other tax breaks, anyone younger than 65 years old with a qualified high-deductible health plan can open an HSA; there's no income cap, notes "Kiplinger's Personal Finance."
IRA Rollover
You can transfer money from your IRA to an HSA without incurring tax liability or a penalty. You can do this only one time, however. The transferred funds count against your contribution limit for the year in which you make the transfer.
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