Under federal law (IRC Section 223), which statement describes the tax advantages of a Health Savings Account (HSA)?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
An HSA offers a triple tax advantage under IRC Section 223. First, contributions the account holder makes are deductible in computing federal taxable income (employer contributions are excluded from income). Second, the money in the account grows on a tax-free basis; interest and investment earnings accumulate without current tax. Third, distributions used for qualified medical expenses are entirely tax-free. To open and fund an HSA, the individual must be enrolled in a qualifying high-deductible health plan and may not be covered by disqualifying other coverage. This combination of tax breaks makes the HSA one of the most tax-efficient ways to save for health care.
Why the other options are wrong
- B) HSA contributions receive a tax deduction, and qualified withdrawals are tax-free, not taxed at every distribution.
- C) Qualified medical expense withdrawals are tax-free; only non-qualified withdrawals are taxable and may face a penalty.
- D) Employees, self-employed individuals, and employers may all contribute to an HSA, and the account holder enjoys the tax benefits.
Memory hook
HSA triple tax: deduct it going in, grow it free, take it out free for medical costs.