Heath Grossman here with the Money Wisdom Question Series. Today’s question is in regard to Health Savings Accounts, commonly referred to as HSA. What are the advantages of having an HSA?

Tax Benefits of an HSA

First of all, in utilizing an HSA, the most important thing to think about is, that you can only use an HSA account or make contributions to an HSA account if you have a high deductible medical plan. If a high deductible medical plan is the right type of medical plan for you, it certainly can be advantageous to contribute money to an HSA account. When it comes down to it, the main advantage of an HSA is that it combines the best features of a traditional IRA with a Roth IRA. If you’re putting money into an HSA, you’re getting a tax-deductible contribution, meaning that for every dollar that you put into it, you’re not paying federal or state taxes on that income.

How to Use an HSA

You’re allowed to put money into an HSA and if you use it for out-of-pocket medical expenses, that’s tax-free for you. In terms of the usage of the account, some folks will use it and spend the money on out-of-pocket medical expenses as they’re contributing to the account. Others might be just contributing to the account and trying to build money up for when they’re older and retired, they can use that money for out-of-pocket medical expenses in a tax-free manner.

Some people are even using it in that same manner to fund out-of-pocket medical expenses younger than 65 because they’re too young to get Medicare and if they’d like to retire younger than 65. Now, another advantage of it is that you don’t necessarily, in all cases, have to use the money for out-of-pocket medical expenses. If you’re 65 or older and you take money out, and it’s not used for out-of-pocket medical expenses, there’s no penalty to do that. However, it will be taxable to you.