A health savings account is a tax-deferred account that was originally designed for healthcare expenses. However, when used properly, the account can become triple tax-free.
For starters, contributions to an HSA are tax-deductible, even if you don’t itemize deductions. Next, earnings in the account grow tax-free.
Finally, distributions are tax-free if they are used for qualifying healthcare expenses, according to the same requirements as deductible medical and dental expenses on Schedule A. Distributions for nonhealthcare expenses generally trigger a 20% penalty.
There’s one additional kicker that the rich and tax-savvy can also use to their advantage: After you turn 65, you can withdraw your HSA money for any purpose at all without penalty, although you’ll still owe ordinary income tax if you spend the money on nonhealth expenses. The same applies if you become disabled.