The funds contributed to the account are not subject to federal income tax at the time of deposit. Funds may be used to pay for qualified medical expenses at any time without federal tax liability.
Withdrawals for non-medical expenses are treated very similarly to those in an IRA account in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier.
To qualify for a health savings account in 2020, one must be enrolled in a High Deductible Health Plan with a minimum deductible of $1,350 for single coverage and $2,700 deductible for family coverage.
HSAs offer three tax benefits:
- Contributions are tax deductible: Like with a 401(k), you contribute pre-tax dollars to a HSA, which reduces your taxable income for the year.
- Earnings grow tax-free: You can invest your HSA contributions and the interest accrues tax-free.
- You can withdraw money tax-free if it’s used for qualified medical expenses. You can find a list of these expenses on the IRS’s website (your HSA provider should also be able to provide you with a list).
Unlike Flexible Spending Accounts (FSAs), the money you contribute to an HSA does not expire. If you don’t use it during the year you contributed, you can keep rolling it over even if you get a new job. This makes HSAs particularly valuable as a secondary retirement savings vehicle.