Health Savings Account
JUMP TO: HSA BENEFITS | STATE TAXES | RETIREMENT VEHICLE OPTIONS
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A Health Savings Account (HSA) is an Internal Revenue Service (IRS) tax-favored account similar to an Individual Retirement Account (IRA). An HSA allows participants to pay for current health expenses, while saving for future qualified medical and retiree health expenses, tax-free. With an HSA, employees benefit from its ability to pay for both medical and non-medical expenses. Withdrawals for non-medical expenses incur a penalty, however, similar to early withdrawals from an IRA. This penalty does not apply to participants over the age of 65, making an HSA a great addition to any retirement savings plan.
Health Savings Account Benefits:
HSAs are designed to offer tax-savings similar to other IRS tax-favored accounts. Their unique benefits make them a preferred choice by certain individuals – such as requiring enrollment in a High Deductible Health Plan (HDHP).
State Taxes:
The IRS Internal Revenue Code (IRC) defines how to treat the taxes associated with HSAs. While most states either already conform to this code or do not have a personal income tax, some exceptions currently exist:
- Alabama
- California
- New Jersey
- Wisconsin
The following have no state income-tax, but do apply tax dividends and interest:
Retirement Vehicle Options:
HSAs have several similarities to IRAs. Their ability to carry-over funds from the previous year allows accounts to accumulate large amounts of funds. The portability of an HSA means that employees don’t lose the funds if switching jobs. These advantages, coupled with the lack of penalty on making non-eligible medical expense withdrawals after the age 65, positions HSAs as another strong option for retirement savings.
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