5.4. Health Savings Accounts

A health savings account (HSA) is a savings account used specifically to pay for qualified medical expenses. HSAs were designed to encourage people to save for future health costs. HSAs can be used to pay for medical expenses for an individual or for a family. HSAs are beneficial because they offer tax advantages, which go to the holder of the account. There are three main tax benefits: (1) contributions to HSAs are tax-deductible, even if deductions are not itemized, (2) taxes on earnings, including interest and dividends, are deferred and may even be exempt at withdrawal, and (3) contributions and earnings can be withdrawn tax-free at any time if they are used for qualified medical expenses.

Qualified medical expenses include expenses for the cure, diagnosis, treatment and prevention of disease. Services of physicians, surgeons, dentists, and mental health practitioners are all included.

An HSA is set up with a qualified trustee that could be a bank, insurance company or broker-dealer. Permission is not required by the IRS to open an HSA.

If money is withdrawn from the account for non-qualified expenses before the age of 65, there will be taxes and penalties on withdrawals. The withdrawals will be taxed at the account holder’s normal income rate and there will also be a penalty of 20%. If money is withdrawn for non-qualified expenses after the account holder turns 65, however, there will be no penalty, but ordinary income tax rates will apply.

There are some restrictions on who is eligible for an HSA. Only individuals or families covered by a high deductible health plan (HDHP) can take advantage of an HSA. For 2022, the IRS defines a high deductible as $1,400 for individuals and $2,800 for families. In 2023, the amounts will change to $1,500 for individuals and $3,000 for families. Contributions can be made by an employer, the policyholder of the HDHP, or another individual. But all contributions become the prope