Certified Financial Consultant (CFC) Practice Exam

What is one of the characteristics of Health Savings Accounts (HSAs)?

1. They require a minimum balance

2. They are owned by the employer

3. They carry interest rates set by the individual

4. They allow the individual to make tax-deductible contributions

The correct answer is: They allow the individual to make tax-deductible contributions

Health Savings Accounts (HSAs) are designed to provide individuals with a tax-advantaged way to save for qualified medical expenses. One of the primary characteristics that makes HSAs particularly valuable is that they allow individuals to make contributions that are tax-deductible. This means that contributions made to an HSA are deducted from the individual's taxable income, potentially lowering their overall tax liability. In addition to being tax-deductible, the funds in an HSA can grow tax-free, and withdrawals for qualified medical expenses are also tax-free. This triple tax advantage—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses—makes HSAs an effective savings tool for managing healthcare costs. The other choices do not accurately represent the primary features of HSAs. For instance, HSAs do not require a minimum balance to maintain the account, they are owned by the individual rather than the employer, and while interest rates on an HSA can vary, they are not set by the individual; instead, they are determined by the financial institution managing the account. Thus, the ability to make tax-deductible contributions stands out as a significant characteristic of HSAs.