If you have a high-deductible health plan (HDHP), you might also want to have a health savings account (HSA). This is an investment account that grows tax-free over the years. You put money in the account before you have to pay any taxes on it, so you save money. You don't pay a tax when you spend it either, as long as you spend it on qualified health expenses -- health care or products on an IRS-approved list.
What You Can Use the Savings For
You can use the money deposited in a health savings account for:
- Hospital costs
- Prescription drugs
You can also put aside money for dental work or vision care expenses.
Some plans allow you to use it for over-the-counter medicines if your doctor writes a prescription for them.
Requirements: You can only get an HSA if you're enrolled in an HDHP. The plan must have at least a deductible of $1,250 a year for one person and $2,500 for a family.
Amount you can save a year: In 2014, you can put up to $3,300 if you're single in your HSA. If you have insurance for your family, you can put in up to $6,550 for a family. If you're over 55, you can put in $1,000 more. Your employer can contribute to an HSA account for you. However, your combined contributions can't exceed the maximum amount allowed in a given year.
Benefits: You don't have to spend the money you deposit into an HSA the same year it was deposited. It carries over from year to year, and the money grows tax-free.
Like a 401K account, you can take your HSA with you if you change jobs.
You can have an HSA and a dependent care flexible spending account (FSA). But you can't put money in an HSA if you use your FSA account to pay for medical expenses.
Warnings: You need to report your HSA on your federal tax return. However, you can claim the money you’ve deposited into the account as a tax deduction and subtract it from your gross income. If you use it for anything except medical expenses, you will have to pay tax on it plus a 20% penalty.