Question

What best describes a tax-advantaged medical savings account?

1) An account that allows individuals to save money for medical expenses on a pre-tax basis
2) An account that provides tax-free withdrawals for qualified medical expenses
3) An account that offers tax advantages such as tax-free growth and tax-deductible contributions
4) All of the above

Answer 1

A tax-advantaged medical savings account is an account that offers tax advantages such as tax-free growth and tax-deductible contributions. It allows individuals to save money for medical expenses on a pre-tax basis and provides tax-free withdrawals for qualified medical expenses.

Step-by-step explanation:

You've accurately described a tax-advantaged medical savings account. These accounts, often associated with high-deductible health plans, offer tax benefits to individuals. Contributions made to these accounts are typically tax-deductible, meaning they can be deducted from the individual's taxable income, reducing their overall tax liability. Moreover, the growth of funds within the account is tax-free, allowing for potential investment gains without incurring additional taxes.

The distinguishing feature is that withdrawals from the account for qualified medical expenses are tax-free as well. This creates a comprehensive tax advantage, encouraging individuals to set aside money for healthcare costs while minimizing their tax burden. In summary, option 3) "An account that offers tax advantages such as tax-free growth and tax-deductible contributions" accurately characterizes the nature of tax-advantaged medical savings accounts.