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Author: John Briggs with Incite Tax

The simplest way to think about a Health Savings Account (HSA) is a tax-deferred, private savings account designed to pay for current and future medical, dental, vision, alternative, and/or preventative expenses with tax-free money.

In order to benefit from an HSA, you need to have a qualified health insurance plan.  Your insurance broker can let you know if your insurance is a qualified plan.  Thanks to the ridiculous increase in premiums over the last couple years, most people have or will be forced to HSA qualified plans.

When HSAs originally came out in 2004, the idea was that you could increase your deductible which leads to lower premium costs.  You are then able to save the difference into an HSA which reduces your taxable income.  Chances are you didn’t have to use any or all of the HSA money, which allowed you to rely on it as a form of retirement.  You’ll be hard pressed to fall into that category today.

Since the “un-affordable care act”, premiums have skyrocketed.  The more realistic scenario is that you are increasing your deductible just to keep your premiums tolerable.  You also find that when you actually need to use your insurance, most everything is out of pocket.   Without an HSA, medical expenses are claimed on Schedule A as a medical deduction. You don’t get the deduction dollar for dollar on Schedule A either, so it’s really a bad deal for you.

With the current landscape of the insurance industry, an HSA makes a ton of sense because there is a huge likelihood you will have out of pocket medical expenses.  By contributing money into an HSA, (which reduces your taxable income), you then pay for your medical expenses out of the HSA (which is a tax free distribution.)

The simple way to think about HSAs:  You are using pretax money to pay medical expenses. 

For a list of all the types of things you can pay for out of an HSA, we are giving you two lists to review at your convenience.

The IRS gives you a very wordy list.

A more concise list of qualified medical expenses.

If you took the time to look at either of the lists, you will see there are a lot of things that qualify.  I’ll finish with a reminder of a simple rule.  Using pretax dollars for costs you have anyway is better than after tax dollars.