UPDATED: January 31, 2024
PUBLISHED: August 22, 2022
What Is a Health Savings Account?

We all know we need to prepare for future healthcare costs, but learning how much to save can be difficult. Health savings accounts, or HSAs, are tax-advantaged savings opportunities for people with a high deductible health plan. They let you cover medical expenses like copays and deductibles while providing a tax break and helping you save for the future. Not everyone has access to these plans, but if you do, they can be invaluable for preparing for future medical expenses. 

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What is an HSA? 

A health savings account (HSA) is a type of savings account that lets you use pretax money to pay for your current and future medical costs. Contributions can be made to your account by the account owner or an employer and are allowed to grow tax-free. Individuals or families can use the money to pay for qualified medical, dental or vision expenses, prescriptions and other covered care.

How do HSAs work?

To qualify for an HSA, you must participate in a high-deductible insurance plan as defined by the IRS. For 2022, the minimum deductible is $1,400 for an individual and $2,800 for a family. There are also contribution caps on these accounts. As of 2022, an individual can contribute up to $3,650, or $7,300 for a family.

Some employers offer high-deductible plans that are HSA eligible, and you can also find them through the insurance marketplace. If you go the marketplace route, make sure that any plan you choose is tagged as ‘HSA-eligible’ since not all high deductible plans will qualify for an HSA. 

If your plan is through your employer, you can set up automatic deductions from your paycheck, much like you do with your 401(k) or other employer-sponsored retirement accounts. If your employer doesn’t offer access to an HSA, but you have a qualifying high-deductible plan, you may be able to set up an HSA on your own; just make sure to do your research before signing up. 

Benefits of an HSA

HSAs have quite a few benefits that make them helpful planning tools. While the money remains yours for as long as it’s in the account, it’s important to note that once you enroll in Medicare (or reach age 65, whichever comes first), you won’t be able to contribute to an HSA any longer. However, you can still use the money on qualified medical expenses.

Tax-free contributions and growth: If you contribute through an employer, your HSA contributions come out of your gross paycheck, thus reducing the amount you pay in taxes yearly. If you are self-employed and make your own HSA payments, your contributions are tax-deductible. 

Your money is allowed to grow tax-free and can be invested in mutual funds, stocks or other types of investments. If you plan to invest these funds, work with a retirement professional or an HSA custodian who can help you make the most of your investment. 

Funds roll over: Unlike flexible spending accounts (FSAs), you don’t have to spend the account balance yearly; your money can accumulate. If your medical expenses remain low, you aren’t required to meet a minimum yearly spend.

Withdrawals are tax-free: As long as you use your funds on qualified medical expenses, you can withdraw money at any time tax-free. If you make a withdrawal for a non-qualified expense after the age of 65, you may have to pay income tax on the amount taken out. If you make a non-qualified withdrawal before age 65, you’ll have to pay taxes and a 20% penalty, just like if you make an early withdrawal from your pre-tax retirement funds.

The account is yours, even if you change jobs: You can keep the funds in your HSA, even if you leave the job with access to a qualified health plan. You must stop making contributions if you can no longer access a qualified high deductible health plan (HDHP). However, you can still allow your existing contributions to grow and use them on qualified medical expenses—you just can’t make new contributions.

HSA drawbacks 

You have to have a high deductible health plan: An HDHP requires that you have the resources available to pay for medical expenses before insurance kicks in. You will have to pay all of your medical costs until you meet your deductible, so it’s essential to have a healthy savings account and emergency fund.

You need to keep good records: HSA owners need to keep detailed notes and records of where and how they spend their funds in case of an audit. It’s generally recommended that you hold onto receipts and account statements for about three years, or to be safe, as long as you have your HSA account. You may want to create digital and paper files as backups if anything happens. 

Not all medical expenses qualify: While many expenses are considered qualified medical expenses according to the IRS, some are not. Insurance premiums, including for Medigap or Medicare supplemental policies, are not qualified (except for some long-term care policies or a continuation of COBRA coverage, among other things). Additional non-qualified expenses include nutritional supplements, cosmetic surgery, teeth whitening, baby items like diapers, baby wipes, and baby bottles and non-essential procedures. 

Final thoughts

Having an HSA is a great way to ensure you’re covered for any medical expenses that come up throughout your life. Like any investment option, it’s vital to do your research and consider all details before signing up. It is a helpful way to save some money on taxes, but you also know that you have a cushion automatically built in to cover anything from minor surgery to major medical treatments. If you can afford the high deductibles and premiums, an HSA may offer you and your family peace of mind for your medical needs. 

Julien and Kiersten Saunders, Money Editors for SUCCESS magazine, are the couple behind the award-winning blog and forthcoming book, rich & REGULAR. They are producers and hosts of the original series, Money on the Table, which blends their passion for food with thoughtful conversations about money

Julien and Kiersten Saunders, Money Editors for SUCCESS magazine, are the couple behind the award-winning blog and forthcoming book, rich & REGULAR. They are producers and hosts of the original series, Money on the Table, which blends their passion for food with thoughtful conversations about money