A health savings account (HSA) offers a tax-advantaged way to save for healthcare expenses while providing flexibility and control over how you manage your medical costs. The benefits of a health savings account include tax-free contributions, tax-deferred growth and tax-free withdrawals for qualified expenses. An HSA combines the benefits of a savings account with the advantages of a retirement account.
A financial advisor can help you determine how an HSA fits into your overall financial plan.
How a Health Savings Account Works
An HSA is a savings account designed to help individuals with high-deductible health plans save for medical expenses. Contributions to an HSA can be made by the individual, their employer or both.
Your contributions are tax-deductible, meaning that deposits paid directly to your account could qualify for a tax reduction. However, contributions made through your employer are already deducted from your income on your W-2.
Once funds are in the account, they can be used to pay for qualified medical expenses, such as doctor visits and prescriptions. The funds can remain in the account for years, even through retirement, making an HSA a long-term savings tool.
Who Is Eligible for a Health Savings Account?
To be eligible for an HSA, you cannot be claimed as a dependent on someone else's tax return, and you cannot be enrolled in Medicare. You must also be enrolled in a high-deductible health plan. An HDHP is defined by the IRS as a health plan with a minimum deductible of $1,600 for an individual or $3,200 for a family in 2024. Additionally, the maximum out-of-pocket expenses for these plans are set at $8,050 for individuals and $16,100 for families.
What Can HSA Funds Be Used For?
HSA funds can be used to cover expenses that insurance may not fully cover, such as:
- Co-pays and deductibles
- Doctor visits and specialist consultations
- Prescription medications
- Dental care, including cleanings, fillings and braces
- Vision care, such as glasses and contact lenses
- Physical therapy and chiropractic services
- Hearing aids and batteries
- Mental health counseling and psychiatric treatment
You should also note that HSA funds may also cover over the counter medications, including first aid items (like bandages), sunscreen and personal protective equipment (PPE) used to protect from injury, illness, or infection; among many other things that insurance may not cover.
6 Benefits of a Health Savings Account
An HSA can offer many advantages. Here are six common benefits to keep in mind when you are funding an account:
- Triple tax advantage: One of the most appealing benefits of a health savings account is its triple tax advantage: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are also tax-free. This means that an HSA can lower your taxable income while also allowing your money to grow over time without being taxed.
- Funds roll over year to year: Unlike flexible spending accounts (FSAs,) where unused funds may be forfeited at the end of the year, HSA funds roll over indefinitely. This makes it an excellent long-term savings tool for healthcare expenses.
- Investment opportunities: Once your HSA reaches a certain balance (usually around $1,000 or $2,000 depending on the provider), you can invest the funds in mutual funds, stocks or other financial investments, allowing your money to grow faster and still tax-free. This makes an HSA not only a healthcare savings account, but also a potential retirement investment vehicle.
- Portability: HSAs are portable, meaning the account stays with you even if you change jobs, health insurance providers or move to another state. The money in your HSA is yours to keep and can be used anytime, whether you are employed or retired.
- Long-term retirement savings: After age 65, you can withdraw HSA funds for any reason without penalty, though non-medical withdrawals will be subject to regular income tax. This makes HSAs a flexible way to save for both healthcare and potential retirement expenses.
- No required minimum distributions: Unlike traditional IRAs or 401(k)s, HSAs are not subject to required minimum distributions (RMDs) once you reach a certain age. This allows you to keep your funds invested and growing for as long as you wish, providing more flexibility in how you use the funds in retirement.
Bottom Line
A health savings account offers a flexible, tax-advantaged way to save for both current and future medical expenses. With triple tax benefits, the potential for investment growth and no expiration on funds, an HSA can be a valuable part of your financial strategy.
Tips to Save on Medical Expenses
- A financial advisor can help you manage medical expenses and build an HSA portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- If you are close to retirement and considering a Medicare savings account (MSA), you may want to review the differences between MSAs and HSAs.
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