Certified Financial Consultant (CFC) Practice Exam

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What can be said about the funds in an HSA regarding tax treatment?

Contributions are taxed but withdrawals are tax-free
All transactions are subject to income tax
Withdrawals for qualified medical expenses are tax-free
Only employer contributions are tax-deductible

The correct answer is: Withdrawals for qualified medical expenses are tax-free

The funds in a Health Savings Account (HSA) have a favorable tax treatment that includes tax-free withdrawals for qualified medical expenses. This feature of the HSA allows account holders to use the funds for eligible healthcare costs without incurring additional taxes, making it a powerful tool for managing healthcare expenses. When contributions are made to an HSA, they are typically tax-deductible, which means that the contributions reduce the taxable income for the year they are made. This allows individuals or families to save on their income taxes while contributing to their healthcare savings. Moreover, the funds in an HSA can grow tax-free over time, as any interest or investment gains accrued within the account are not subject to taxation as long as they remain in the HSA. By focusing on why withdrawals for qualified medical expenses are tax-free, it's clear that the HSA is designed to encourage savings for healthcare costs while providing tax advantages that can significantly benefit account holders.