A guide to Health Savings Accounts
What is an HSA?
An HSA is a special savings account that helps you put aside money to pay for medical costs. You can use it to pay for qualified medical expenses like deductibles, copays, prescriptions, dental cleanings, eyeglasses, and over-the-counter medicine.
You can even invest your HSA funds in stocks or mutual funds to help your savings grow for life after retirement.
HSAs are sometimes available through an employer, but you can also open one on your own through a bank or investment company that can help you manage your funds.
How HSAs are different than Flexible Spending Accounts
An HSA and Flexible Spending Account (FSA) are similar in that they are both tax-free accounts that help cover out-of-pocket expenses, but there are big differences between the two.
Unlike an HSA, which you own yourself, an FSA is an employer benefit and is owned by the employer. So you can't sign up for one on your own. This also means that if you leave your job, your account and the money in it will likely stay behind with the employer.
FSAs also reset each year, and money you have left over from the last year typically goes away. But in an HSA, your funds roll over year to year, letting you continue to build your savings.
Tax benefits of an HSA
The money you put into the account is not taxed.
If you contribute through payroll deductions at work, that money comes right out of your paycheck before your taxes are calculated.
Payments are completely tax-free on qualified medical expenses.
You should always confirm what expenses are allowed with your specific HSA. If you’re under 65, non-qualified expenses will be taxed, and you may get a 20% tax penalty.
Any interest or investment earnings on the money in your HSA grow tax-free.
This can help prepare for large expenses later. After you turn 65, you can use your HSA funds for any reason without a penalty, though you’ll pay taxes on the non-medical costs.
Getting started with an HSA
You can enroll in an HSA on your own or through an employer plan if you meet certain eligibility requirements, including:
- Are enrolled in a qualified High-Deductible Health Plan (HDHP). An HDHP is a health insurance plan with lower monthly costs but a higher deductible than most traditional plans, so you may pay more costs yourself.
- Don't have medical benefits from any other non-qualified health plan
- Can't be claimed as a dependent on someone else’s tax return
- Aren’t eligible for Medicare
How to fund and use an HSA
You can make regular contributions to your HSA on your own or through payroll deductions, if your employer offers that option. The IRS sets a yearly limit for how much can be contributed, so be sure to check the limit at the start of each year.
You’ll likely get a debit card or checks connected to your HSA that make it easy to pay for eligible health expenses with your account. You can also pay out-of-pocket and save your receipts to get reimbursed from your HSA funds later.
In addition to withdrawals for medical expenses, you can choose to invest a portion of your funds through your HSA provider portal. This gives your account the chance to build even more for future health needs or financial goals after 65, like retirement.
