The Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health insurance plan. Often coined as the “Medical IRA,” the HSA provides an immediate federal tax deduction for the contribution, tax deferred growth, and qualified distributions (those used for qualified medical expenses) are tax-free.
Contributions to an HSA can be made anytime throughout the year, even after a qualified medical expense has been paid. For 2016, individuals insured under a high deductible health insurance plan can contribute up to $3,350 (plus an additional $1,000 if age 55 or older) while those covered under a family plan can contribute up to $6,750.
Non-qualified distributions made before age 65 are generally subject to income taxes and a 20% penalty, while distributions made after age 65 are subject to income taxes but no penalty. Distributions for qualified medical expenses are always tax-free.
Depending on your account balance, some HSA providers offer investment options which may allow you to invest your contributions throughout the year. Over time, these contributions may grow tax-deferred just like money invested in an IRA or 401k account.
Health Savings Accounts (HSAs) may allow you to accumulate more assets on a tax-deferred basis towards retirement or other long-term goals. In addition to the annual 401k limit of $18,000, taxpayers may qualify for an additional $3,350-$6,750 deduction by funding a Health Savings Account. After age 65, the HSA balance can be used in a very similar manner as your other retirement accounts.