How Does a Health Savings Account Work? HSAs Explained
Article by: Sydney Frazer
We know what you are probably thinking: is there really another health insurance acronym I need to learn? While the answer to this question is yes, you don’t need to stress! We’ve answered all the questions you have about health savings accounts (HSAs) so you never again have to ask “how does a health savings account work?”
What Is An HSA?
A health savings account (HSA) is a tax-free savings account specifically for health-related expenses. Put simply, it is a way for you to reserve funds for medical expenses without pay taxes or interest on those dollars. The funds you contribute to your HSA go directly into your bank account before they are taxed making them pre-tax earnings. An HSA is an easy way to make your dollars go further when it comes to medical expenses.
HSAs can only be paired with certain high deductible health plans (HDHPs). If you have an HDHP, an HSA is a great way to reserve funds in case you encounter large medical bills and want to avoid paying taxes on that amount.
An HSA is set up separately from your other bank accounts and allows you to set aside money for medical expenses that you incur after you open the account. One of the great things about an HSA is that any unused funds you have roll over from year-to-year, and these funds can be used for health-related expenses during retirements.
What Can I Use My HSA Funds For?
Funds in your HSA can only be used for “qualified medical expenses.” According to the IRS, medical expenses are defined as “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body” and includes “the cost of equipment, supplies, and diagnostic devices needed for those purposes.” Wondering what that means? It is just a fancy way of saying health-related expenses. This includes things like:
- Doctor visits
- Prescription Drugs
- Medical supplies
- Long-term care costs
- Chiropractic services
- Contact lenses
- Lab tests
- Dental treatment
- Hearing aids
- Psychiatric care
The entire list is pretty extensive, but you can find it here if you want to check if something counts as a qualified medical expense. Be sure to note that these expenses aren’t just medical, but also include dental and vision!
Stride tip: Be careful about using your HSA funds for non-qualified expenses. If you do, you’ll end up paying income tax on the amount used, as well as a penalty tax (of 20 percent!!) for making a non-qualified withdrawal.
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