Which of the following is a primary benefit of having a tax-advantaged medical savings account, such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA)?

• A. Interest earned in the account is subject to immediate taxation.
• B. Contributions to the account can reduce your taxable income.
• C. Funds in the account can only be used for non-medical expenses.
• D. Withdrawals from the account are always subject to penalties.

Answer: (B)

Verified step by step guidance

1. Understand the concept of tax-advantaged medical savings accounts, such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). These accounts are designed to help individuals save money for medical expenses while providing tax benefits.
2. Recognize that contributions to these accounts are typically made on a pre-tax basis, meaning they reduce your taxable income. This is one of the primary benefits of these accounts.
3. Note that funds in these accounts can generally be used for qualified medical expenses without incurring penalties or taxes. However, using the funds for non-medical expenses may result in penalties and taxation.
4. Understand that interest earned in an HSA is not subject to immediate taxation, as long as the funds are used for qualified medical expenses. FSAs, on the other hand, do not earn interest.
5. Conclude that the correct answer is: Contributions to the account can reduce your taxable income, as this aligns with the primary tax benefit of these accounts.