What is an HSA?

What is a health savings account (HSA)?*

An HSA is a savings account that provides tax advantages when used in combination with a high-deductible insurance plan. The money in an HSA helps pay the deductible, as well as any other eligible medical expenses (including coinsurance), that may not be covered by your health plan after you meet your deductible.

An HSA is similar to an individual retirement account (IRA) because it can be invested in a variety of investment vehicles while accumulating tax-free interest. However, your HSA funds are not taxed when withdrawn to pay for qualified medical expenses. You can make withdrawals from your HSA for nonmedical expenses, but it will be taxed as normal income and subject to a 10% penalty (if withdrawn before age 65).

At the end of each year, any unused funds in your HSA remain in the account and continue to earn interest tax-free.

HSA funds are portable, which means you own the account. Even if you switch jobs, the funds stay with you.

Advantages of an HSA

• Control: The money in your HSA belongs to you — you decide how to spend it based on your health care needs and budget. You can even use your HSA to pay the medical expenses of family members not covered by your high-deductible plan.
  
• Flexibility: You can deposit (until age 65) or withdraw your money any time without a tax penalty as long as you use the money for qualified medical expenses (there is a yearly maximum amount for contributions).
  
• You own it! Your HSA is yours for life. It's portable, so you can take it with you from one job to the next. You can even continue to make contributions and withdrawals. Even though you can't make contributions once you reach age 65, your HSA continues to earn tax-free interest — and you can still use your account to pay for health-related expenses tax-free!
  
• Tax Savings: An HSA lets you to put away money for medical expenses before taxes are taken out. This means that you can set aside income-tax-free dollars in an HSA to pay for your qualified medical expenses. While your HSA grows, it also accumulates interest on a tax-free basis. You pay no taxes or penalties when you use your HSA to pay for your qualified medical expenses. When you turn 65, the amount remaining in your HSA can serve as a retirement benefit by covering qualified medical costs such as deductibles and coinsurance.

Need more basic information about HSAs?

Download and print out an HSA brochure from the U.S. Department of the Treasury.**

For more information about HSAs, see Frequently Asked Questions.

Other resources you can check for more information about HSAs and the financial institutions that offer:

• www.treas.gov**
• www.irs.gov**

*HSAs have tax and legal ramifications. The information provided herein is for informational purposes only and is not intended as tax or legal advice. Consult a tax or legal professional for advice regarding HSAs.

**We do our best to ensure that the information on the Web sites shown above is useful, but can't be responsible for the content of those sites or any information you may take from them (please read our legal disclaimer). When you click on a site link above, it will open in a new window so that you can explore that site without having to leave here. When you are through visiting the other site, you can close that window and return to the BCBSNM site.