What is a Health Savings Account (HSA) and what are three tax advantages it offers?

• A. Tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• B. Only tax-free growth.
• C. Only tax-free withdrawals.
• D. Contributions are taxed.

Answer: (A)

Health Savings Accounts are designed to help you save for medical costs while you’re on a high-deductible health plan, and the standout feature is the triple tax advantage. First, contributions are tax-deductible (or pre-tax if they’re made through payroll), which lowers your taxable income for the year. Second, any money the account earns can grow without being taxed, so your savings compound more efficiently. Third, withdrawals that are used for qualified medical expenses are tax-free, so you don’t pay taxes when you pay for those costs.

This combination—deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—best captures why an HSA is so powerful. By contrast, options that mention only growth or only withdrawals miss two of the three tax benefits, and saying contributions are taxed is inaccurate. Remember also that you must have a high-deductible health plan to open an HSA, and unused funds roll over year to year for future medical costs. Penalties can apply for non-qualified withdrawals before age 65, with some exceptions after 65.