Benefits of Using a Health Savings Account (HSA)

A health savings account, or HSA, is a tax-advantaged account that can be used to pay for qualified medical expenses including copays and deductibles, provided you have a high-deductible health care plan (HDHP).

By using pretax money to save for these expenses, an HSA may be used to help lower overall medical costs. What’s more, HSAs can also be a savings vehicle for retirement that allows you to put away money for later while lowering your taxable income in the near term. Here’s the full story on these accounts and their pros and cons.

Reasons to Use a Health Savings Account (HSA)

Here are some of the key advantages of contributing to and using an HSA.

HSAs Can Make Health Care More Affordable

An HSA is a tool designed to reduce health care costs for people who have a high-deductible health plan (HDHP). In fact, you must have an HDHP to open an HSA.

If you’re enrolled in an HDHP, it means you likely pay a lower monthly premium but have a high deductible. As a result, you typically end up paying for more of your own health care costs before your insurance plan kicks in to pick up the bill. Combining an HDHP with an HSA may help reduce the higher costs of health care that can come with this type of health insurance plan.

Some numbers to note about qualifying for and using an HSA:

•   For 2024, the IRS defines an HDHP as having an annual deductible of at least $1,600 for single people and $3,200 for family plans.

•   The annual out-of-pocket expenses cannot exceed $8,050 for those enrolled in single coverage and $16,100 for family coverage.

•   Yearly HSA contributions have a limit of $4,150 for individuals and $8,300 for families as of 2024.

•   People 55 or older by the end of the tax year have the option to make an additional contribution of $1,000 per year, which is known as a catch-up contribution.

HSA contributions can be made by the qualified individual, their employer, or anyone else who wants to contribute to the account, including friends and relatives.

HSA Contributions Stretch Your Health Care Dollars

Contributions are made with pretax money and can grow tax-free inside the HSA account. Because money in the account is pretax — Uncle Sam never took a bite out of it — qualified medical expenses can essentially be paid for at a slight discount.

HSA Funds Can Be Used for Many Health Care Expenses

The money you contribute to your HSA can be used on an array of health care expenses that aren’t paid by your insurance. Rather than dipping into your checking or savings account, you can use an HSA to pay for qualified medical costs. The IRS list of these expenses includes:

•   Copays, deductibles, and coinsurance

•   Dental care

•   Eye exams, contacts, and eyeglasses

•   Lab fees

•   X-rays

•   Psychiatric care

•   Prescription drugs

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

HSAs Offer Triple Tax Advantages

Another reason to start a health savings account is that putting money into an HSA lowers taxable income. The money contributed by a qualified individual to the account is pretax money, so it will be excluded from gross income, which is the money on which income taxes are paid.

This is the case even if an employer contributes to an employee’s account on their behalf. So if you earn $80,000 a year and max out your HSA contribution, you will only be taxed on $75,850. If you make any contributions with after-tax funds, they are tax-deductible on the current year’s tax return.

There are other considerable tax advantages that come with HSAs. Contributions can earn interest, or returns on investments, and grow tax-free. This tax-free growth is comparable to a traditional or Roth IRA.

Here’s another HSA benefit: Not only are contributions made with pretax money, but withdrawals that are made to pay for qualified medical expenses aren’t subject to tax at all. Compare that to say, Roth accounts where contributions are taxed on their way into the account, or traditional IRAs where withdrawals are taxed.

Recommended: HSA vs HRA: What’s the Difference?

HSA Funds Are Investable

The funds in an HSA can be invested in ways that are similar to other workplace retirement accounts. They can be put into bonds, fixed income securities, active and passive equity, and other options. You could potentially be investing money in this way for decades prior to retirement.

Using an HSA for retirement might also be a good way to prepare for health care expenses as you age, which can be one of the biggest retirement expenses. According to some estimates, a 65-year-old couple may need $315,000 or more to cover health care costs over the rest of their lives. An HSA could be a good way to stash some cash to put towards those charges.

If you were to become chronically ill or need help with the tasks of daily living as you age, you might need long-term care at home or in a nursing facility. Medicare does not cover long-term care, but long-term care insurance premiums are qualified expenses and can be paid with HSA funds. Saving in an HSA before these potential costs arise may offset overall spending on health care expenses later in life.

The Money in an HSA Is Yours and Stays That Way

Another advantage of HSAs is that contributions roll over from year to year. In comparison, flexible spending account (FSA) funds, which also allow pretax contributions to save for qualified health care expenses, must be spent in the same calendar year they were contributed, or you risk losing the funds. HSAs don’t follow this same use-it-or-lose-it rule. There is no time limit or expiration date saying you must spend the money you contributed by a certain date.

What’s more, your HSA funds follow you even if you change jobs and insurance providers. It can be very reassuring to know those funds won’t vanish.

Disadvantages of Using a Health Savings Account

Here are some potential downsides of HSAs to note.

You May Not Be Qualified to Open and Contribute to an HSA

You may only open and contribute to an HSA if you are enrolled in a high-deductible health plan, or HDHP. The IRS defines this as having a deductible of at least $1,400 for an individual and $2,800 for a family.

If You Have Medicare, You Cannot Have an HSA

Once you enroll in Medicare, you can no longer contribute to an HSA, since Medicare is not an HDHP. If you previously opened an HSA, those funds are still yours, but you can’t continue adding to the account.

Not All Expenses Will Be Covered

There are a number of health care expenses that do not qualify for HSA coverage. These include:

•   Cosmetic surgery

•   Teeth whitening

•   Gym memberships

•   OTC drugs

•   Nutritional supplements

HSAs May Charge Fees

If you decide that a health care savings account is right for you, don’t be surprised if you are hit with fees when you open one. Some of these accounts may charge you every month to maintain the account, especially if a professional is advising you on investments. These fees may be as low as $3 or $5 a month or considerably higher.

You may also be assessed a percentage of the account’s value, with that fee rising as your account’s value increases. It’s important to read the fine print on any account agreement to make sure you know the ground rules.

You May Be Penalized for Early Withdrawal

Also note that if you withdraw funds from your account for something other than a covered medical expense before you turn 65, you could be hit with fees. These withdrawals will typically be subject to income taxes and a 20% penalty.

How HSAs and FSAs Differ

HSAs, as described above, are health care savings accounts for individuals who have a high-deductible health plan. Another financial vehicle with a similar-sounding name are FSAs, or flexible spending accounts. An FSA is a fund you can put money into and then use for certain out-of-pocket health care expenses. You don’t pay taxes on these funds. Two big differences versus HSAs to be aware of:

•   To open an FSA, you don’t need to be enrolled in an HDHP. This is only a qualification for HSAs.

•   The money put in an FSA account, if not used up by the end of the year, is typically forfeited. However, there may be a brief grace period during which you can use it or your employer might let you carry over several hundred dollars. With an HSA, however, once you put money in the account, it’s yours, period.

The Takeaway

Health savings accounts, or HSAs, offer a way for people with high-deductible health plans to set funds aside to help with health care expenses. The money contributed is in pretax dollars, and it brings other tax advantages. What’s more, funds in these HSAs can roll over, year after year, and can be used as a retirement vehicle. For those who qualify, it can be a valuable tool for paying medical expenses and enhancing financial health, today and tomorrow.

Looking for a bank that can help you boost your financial life?

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBK-Q224-1890273-V1