Certified Financial Consultant (CFC) Practice Exam

How are contributions to a Health Savings Account treated in terms of taxation?

1. They are taxable upon withdrawal

2. They are tax deductible

3. They are taxed at a flat rate

4. They are not taxed at all

The correct answer is: They are tax deductible

Contributions to a Health Savings Account (HSA) are indeed tax-deductible, meaning that the amount you contribute can be deducted from your taxable income for the year in which you make the contribution. This deduction reduces your overall taxable income, which, in turn, may lower your overall tax liability. This feature encourages individuals to save for their medical expenses, as it provides an immediate tax benefit when contributions are made. In addition to the tax-deductible aspect, earnings on investments within the HSA grow tax-free, and withdrawals for qualified medical expenses are also not taxed. This triple tax advantage makes HSAs a valuable tool for healthcare savings and financial planning. Thus, the correct classification of HSA contributions in terms of taxation aligns perfectly with the option indicating they are tax deductible.