Hardship funds allow you to pay for health expenses incurred due to a change in income or assets. This includes paying medical bills, moving expenses, and other unforeseen expenses you’re experiencing. In addition, they can be used to purchase medical insurance. The amount of your medical income is reduced by the amount of the hardship fund and the difference is transferred to your health savings account, which earns interest or pays you tax-free.

How to create a hardship fund

To create a hardship account, choose an income level that will allow you to survive without using your savings. Make sure you get maximum income while creating the fund.

Choose an account type.

For example, if you’re working while pursuing a degree, a medical insurance policy, and other expenses, then you should decide which account type to start with.

Choose a tax year.

You won’t be able to use the funds your account has accumulated without filing taxes in that year.

Choose how to pay the first month’s expenses.

You don’t need to pay the fees upfront—the funds get transferred straight away to your health savings account. But you can set a time period for paying some or all you earn each month.

After you decide how to pay your account’s first month’s expenses, your account should begin earning interest. Interest is paid every month by the bank or trust that holds the account — not you.

Once your account starts earning interest, the interest rate you pay will depend on the rate available from the market—and not your individual interest rate.

You’ll automatically start earning your interest when you file your taxes for the year.

The interest is added to your daily balance, and you’ll pay at the beginning of each month. If you do not pay interest for a while, your interest will gradually accumulate with inflation.

Your account earns interest for the period you have the interest rate available, plus or minus a percentage of the original rate. For example, if the stock market is 1, then your account earns 1 percent and the interest will be subtracted from your average balance every 12 months. In other words, the interest you pay will increase each 12-month period.

You can’t pay off your account at the beginning of your next tax year. Your total income should be less than 10 percent of your adjusted gross income the year before.

When to use your health savings account

You can build your Health Savings Account even if

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