What Are the Tax Advantages of an HSA?

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  Health Savings Accounts, or HSAs, have been available since 2004. They are a vehicle to save for health care expenses when coupled with a high deductible insurance plan. Saving for health care is always a good idea, and there are substantial tax advantages to an HSA account.
  
  

Reduced Tax Liability

• The money you contribute to an HSA is an "above-the-line" deduction, meaning that you can reduce your taxable income by the full amount of your contribution. This is true of both federal and state taxes. You do not need to itemize the deduction on your tax return--instead, fill in Form 8889 and take the deduction as an adjustment to income on Form 1040. If your employer makes a contribution to your HSA, this is not counted as taxable income.
  
  

Tax-free Savings

• Interest and capital gains on investments within your HSA are free of tax until you reach age 65. If at this stage you withdraw them for non-medical expenses, you will be taxed at the normal rate, but you can still use them tax-free for health care costs.
  
  

Tax-free Cash

• Your savings in an HSA grow tax-free, and there is no tax penalty when you withdraw them to pay for legitimate medical expenses. The definition of medical expenses is broadly drawn, so there is a wide range of items that are eligible, from hospital and doctor's office visits, to dental and eye care, and even household purchases such as over-the-counter medicines.
  
  

Tax-free Medicare Expenses

• When you become eligible for Medicare, you can also take cash from your HSA to pay premiums, copays and deductibles. This is also true of any contributions to a retiree medical plan through your employer.