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

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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.

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