Do you earn interest on HSA accounts?
Health Savings Accounts (HSAs) have become increasingly popular among individuals looking for a tax-advantaged way to save for future medical expenses. As with any financial account, one common question that arises is whether or not you earn interest on HSA accounts. The answer to this question is both straightforward and complex, depending on the type of HSA account you have and the financial institution managing it.
Understanding HSAs
First, let’s clarify what an HSA is. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying for qualified medical expenses of the account holder. To be eligible for an HSA, you must be covered by a high-deductible health plan (HDHP) and not be enrolled in any other health coverage, such as a spouse’s plan or Medicare.
Earned Interest on HSAs
The answer to whether you earn interest on HSA accounts is yes, you can earn interest on the funds in your HSA, but it’s not guaranteed. HSAs can be set up as either custodial accounts or as deposit accounts with financial institutions. If your HSA is a custodial account, it will typically offer a fixed interest rate, which can vary over time. This interest is generally earned on the funds in your account and can accumulate, allowing your savings to grow.
Deposit Account HSAs
On the other hand, if your HSA is set up as a deposit account, such as a savings or money market account, you may earn a variable interest rate. The interest rate on these accounts can fluctuate based on market conditions and the financial institution’s policies. While deposit account HSAs may offer higher interest rates than custodial accounts, they may also come with limitations on the number of transactions you can make each month.
HSAs and Taxes
It’s important to note that the interest earned on HSA accounts is tax-free, just like the contributions and withdrawals for qualified medical expenses. However, if you withdraw funds from your HSA for non-qualified expenses before age 65, you will be subject to income tax on the withdrawn amount, plus a 20% penalty. After age 65, you can withdraw funds for non-qualified expenses without a penalty, but you will still owe income tax on the withdrawn amount.
Conclusion
In conclusion, you can earn interest on HSA accounts, but the rate and terms will depend on the type of account you have and the financial institution managing it. It’s essential to understand the terms of your HSA and how interest is earned to make the most of your tax-advantaged savings. By carefully managing your HSA, you can not only save for future medical expenses but also potentially grow your savings over time.
