Health savings accounts (HSAs) provide similar tax-free benefits as Roth IRAs. However, you don't have to reach age 59½ to fully utilize HSA distributions. As long as your HSA distributions cover qualified medical expenses (QMEs), you shouldn't owe the IRS a penny regardless of your age and having never paid taxes on your tax-deferred HSA deposits. In other words, you may be off the hook for taxes on a considerable percentage of your income through HSA contributions and qualified distributions. If you think the QME list is full of obscure medical occurrences that most people will never experience, think again.
HSA funds can directly cover QMEs or reimburse you for a QME you previously paid out of pocket, but only if the expense was assessed after the establishment and funding of your HSA. Distributions for non-QMEs will be taxed as income and may bear an additional 20% penalty. The penalty is waived once you reach age 65 or if you become permanently disabled.
Your spouse and anyone else you can claim as a dependent on your tax return may garner the tax-free benefits of your HSA distributions.
NOTE: The above lists are not comprehensive. See IRS Publication 502 for a full list of qualified and non-qualified medical expenses.
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