Which of the following describes how money in an HSA is handled?

The correct choice highlights a key benefit of Health Savings Accounts (HSAs): money deposited into the account is not subject to income tax at the time of contribution. This tax advantage is designed to encourage individuals to save for healthcare expenses. The contributions made to the HSA can be deducted from gross income, thereby reducing overall taxable income for the year.

Additionally, funds within the HSA can accumulate and grow tax-free. This means that any interest or investment income earned on the balance in the account is also not subject to taxation, as long as the funds are utilized for qualified medical expenses. If the money is used for non-qualified expenses, it may incur taxes and possibly penalties, particularly if withdrawn before the age of 65.

This characteristic makes HSAs a powerful tool for both saving for medical expenses and tax planning. The combination of tax-free contributions, tax-free growth, and potential tax-free withdrawals for eligible expenses creates a unique financial vehicle for individuals looking to manage healthcare costs efficiently.