Question: What are health savings accounts?
Answer: Health savings accounts (HSAs) are similar to IRAs, except they’re intended for medical expenses rather than for retirement. You can make a tax-deductible contribution to an individual HSA or to a family HSA. If you’re 55 or older, your annual contribution can be larger. If your employer makes the contribution as part of a cafeteria benefits plan, it isn’t taxable to you. Earnings on investments made with your contributions won’t be taxed currently, and withdrawals are also tax-free if they are used for a broad range of medical expenses.
Of course, there are restrictions. To be eligible for an HSA, you must be covered by a health plan with a high deductible. These “high deductible” health plans can save you money, since they should have lower premiums. You must be under 65, and therefore not eligible for Medicare, when opening an HSA. If you withdraw HSA funds for nonhealth expenses, you’ll pay taxes, plus be subject to a penalty if you do it before age 65.