Q:

How does an HSA work?

A:

Quick Answer

A health savings account is a tax-free account where consumers store money for health expenses. Any money placed into the account is not taxed, and any interest accumulated is tax-free. The money can be withdrawn at any time, and as long as the expenses it is used for are medical expenses, no taxes are assessed on the payments.

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Full Answer

Health savings accounts are designed to work with high-deductible health insurance plans. This allows consumers to save money with cheaper insurance premiums while maintaining a reservoir of money to pay deductibles in the case of a severe illness. They also serve as a way to prepay for health care later in life, since the money accumulates more interest the longer it remains in the account.

In addition to medical expenses and deductibles, HSA funds can be used to pay for health insurance premiums for unemployed workers, allowing those without jobs to maintain medical coverage.

If an HSA owner reaches the age of 65, he can withdraw freely from the account, even for nonmedical purposes. These withdrawals are not taxed, unlike nonmedical withdrawals that occur before the age of 65. This allows the HSA to serve as a secondary retirement fund if not used for major medical expenses.

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