What is an HSA? The Benefits of This Underused Account

See how you can utilize a health savings account (HSA) to maximize your tax savings and also pay for essential health care expenses now and during retirement.

What is an HSA? The Pros and Cons to This Underused Account
Updated May 13, 2024
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Health savings accounts can be important tools for retirement savings if you know how they work and use them correctly when it comes to tax advantages. With both tax-deductible and tax-free savings, an HSA can be an easy step in starting to put away money for those who are educating themselves on how to invest money and save for retirement. 

If you know how much to save for retirement, an HSA might help you reach your desired amount much quicker. And, of course, an HSA will help you with out-of-pocket costs when it comes to your health care, now and into retirement.

In this article, we’ll discuss what an HSA is, how it works, what tax benefits it offers, and how you can open one.

In this article

What is an HSA?

An HSA is a savings account designed specifically for paying off eligible medical expenses. Your HSA balance can be used at any time to pay for qualified medical costs, so it’s not only for when you reach retirement age. However, the average retired couple may need more than $200,000 saved up to cover common healthcare expenses during retirement. This is why saving is important, and it’s best if you start saving sooner rather than later. With an HSA, you can start saving today to pay for the medical costs you can reasonably expect to come down the road.

HSAs are only available to individuals whose health insurance coverage qualifies as a high-deductible health plan, so be sure to review your health plan to determine your eligibility. An HDHP typically covers preventive costs, but then you have to pay your deductible before health insurance would kick in for qualified expenses.

Keep in mind, not every health insurance plan with a deductible will qualify for an HSA. And the minimum deductible limit for a plan to qualify as an HDHP can change from year to year, so it’s always a good idea to check what the minimum limit is. In 2024, the minimum deductible is $1,600 for individuals and $3,200 for families.

Also, HSAs are not the same as flexible spending accounts. Although both types of accounts can be used to pay for certain healthcare costs, they have one primary difference: FSA funds don’t typically roll over from year to year, whereas HSA funds do roll over to the following year. So with an FSA, it’s in your best interests to use your funds within the plan year, or you’ll likely lose them.

With an HSA, you don’t have to worry about losing your funds if you don’t use them within the plan year. Even if you no longer have an HDHP, you can still use the funds already in your HSA.

How does an HSA work?

If you have an HSA-eligible health care plan, you’re allowed to make contributions to an HSA. You can then use those funds however you want, but the best option will likely be for qualified medical expenses.

Contributing to an HSA

Although you can use existing HSA funds at any time, you can contribute funds to an HSA only when you’re on an HDHP. The Internal Revenue Service (IRS) also puts an annual limit on how much money you can contribute to an HSA. HSA contribution limits dictate how much you can contribute to an HSA on an yearly basis. These limits can change each year because they’re adjusted for inflation.

For 2024, the individual HSA contribution limit is $4,150 and the family limit is $8,300. The difference in limits depends on the type of health care plan you have. Individual coverage is only for yourself, while family coverage covers multiple people. Family HDHP coverage gets a higher HSA contribution limit.

If you’re 55 or older, you can contribute up to $1,000 extra to your HSA. Keep in mind if you’re 65 or older, you can’t contribute to an HSA anymore.

If you have an HSA, you can contribute to it by logging into your online account and transferring funds. Because it works just like an online savings account, it’s easy to make contributions. Your employer may also choose to make contributions to your HSA as part of your benefits package. These would typically happen automatically whenever you receive your paycheck.

Your own contributions to an HSA are tax-deductible, which means you may owe less when you file your tax return. These contributions are usually taxed before you make them, which is why you then get to deduct them. But employer contributions are typically pre-tax contributions, which means they aren’t included in your income and, therefore, haven’t been taxed and can’t be deducted.

Using your HSA money

You can use the account balance in your HSA whenever you want and for anything you want, but there are a few guidelines to keep in mind:

  • If you use your HSA funds on qualified medical expenses, you won’t be taxed on those funds.
  • If you use your HSA money on something other than a qualified medical expense, you’ll be assessed a 20% fee and will have to pay income tax on the funds. There is no 20% penalty for using funds on non-qualifying expenses if you’re 65 or older, but you would still have to pay income tax.
  • You won’t be eligible to continue contributing to an HSA if you’re enrolled in Medicare, but you can still use HSA funds to cover certain Medicare premiums. Qualified medical expenses for HSA distributions include Medicare Part B, Medicare Part C (Medicare Advantage plans), and Medicare Part D. Premiums for Medigap policies don’t count as qualified medical expenses for HSA distributions.

You can avoid both a penalty fee and income tax if you use your HSA account funds on medical expenses like these:

  • Acupuncture
  • Alcoholism treatment and meetings
  • Ambulance
  • Annual physical examination
  • Bandages
  • Birth control pills
  • Body scan
  • Chiropractor
  • Contact lenses
  • Crutches
  • Dental expenses
  • Guide dogs or other service animals
  • Hearing aids
  • Hospital services
  • Insurance premiums, including coinsurance and copayments
  • Learning disability training
  • Lodging for medical care
  • Long-term care
  • Meals at a healthcare facility
  • Medical conferences
  • Operations
  • Prescription drugs/Over-the-counter medicines
  • Therapy
  • Weight-loss programs
  • Wheelchair
  • X-rays
  • Vision care

In general, a medical expense can qualify for the use of HSA funds if the expense has a specific medical purpose behind it. This could include the improvement of your mental health or relief from a particular ailment or disease. General expenses, like paying for diapers or maternity clothes, wouldn’t typically qualify as eligible medical expenses.

How you can access your HSA funds will depend on the insurance company that provides your HSA. Many HSA providers offer a debit card that links to your HSA and can be used for qualifying expenses. You may also be able to write checks with your account or pay for eligible bills through your online account.

Benefits of an HSA

HSAs are known for their wide range of benefits that can help you with saving for retirement and medical expenses along the way.

Here are the most valuable benefits included with an HSA:

  • Tax-free dollars: Any employer contributions made to your HSA aren’t included as income tax, and any contributions you make are tax-deductible. You also won’t be taxed on any withdrawals you make to pay for eligible medical expenses with your HSA funds.
  • Tax-free growth on those dollars: Any funds within your HSA grow free of taxes over time. This is a big difference from your traditional savings accounts, which are taxed based on the interest they earn.
  • Lowers your overall tax burden when you put money into an HSA: Because your contributions to an HSA are tax-deductible, your overall tax liability is reduced.
  • Can be used on non-eligible expenses: An HSA acts as a high-value emergency fund that can function for both eligible medical expenses and non-eligible expenses. Keep in mind HSA funds used for non-eligible expenses are considered taxable income, and you’ll incur a 20% penalty fee as well if you use your money in this way before the age of 65. After 65, HSA funds used for non-eligible expenses are still taxable, but you won’t incur any tax penalty fee.
  • Rolls over from year to year: Unlike an FSA, your HSA money rolls over from one year to the next year. Because of this, there’s no stress about trying to use all your HSA money before the year ends.
  • You keep access even if you switch health plans in the future: An HDHP is the insurance coverage you need to be able to contribute to an HSA, but you don’t need to still have an HDHP to access your HSA. If you change plans in the future, you can still access your original HSA and use its funds as needed.
  • Invest in things like mutual funds: Depending on your HSA provider, you may have the option of investing money in mutual funds or other investment opportunities. This can significantly increase your overall retirement savings if your investments grow each year. Remember this growth is tax-free and also doesn’t count toward your annual HSA contribution limits.

How investing your HSA funds can benefit you

Investing the funds in your HSA into the stock market gives the money a chance to grow so that it can help cover the costs of major health care expenses.

Over many years, it is possible that you could accumulate a large pool of money in your account. That could be the difference between being able to pay for long-term care that you choose, and being forced to rely on Medicare or other forms of insurance or funding that you have no control over and that limit your choice of facilities.

Investing the funds in your HSA in the market gives you more choice for the future, and is a tax-advantaged way to boost your financial stability. The money you deposit directly into an HSA likely cannot keep up with increases in costs of medical expenses unless you invest those funds into stocks or mutual funds that grow your HSA with the market.

How to open an HSA

You can open and set up an HSA through a bank or an HSA financial institution. It’s easy to conduct an online search for companies that provide HSAs, but you could also check through your current health coverage provider or your employer.

If your employer offers an HSA, you would set one up through them and then contribute to that account via payroll deduction. Speak with your work’s benefits or human resources administrator to see whether your employer offers an HSA. If they don’t, you would need to find one on your own.

There are hundreds of banks and credit unions across the country that can set up an HSA for you. As you consider which company to go with, be aware that some may have monthly maintenance fees. 

Also, not every HSA offers a full range of investment options. In this way, HSAs can be similar to IRAs. So if being able to choose how your HSA money is invested is something you’re interested in, be sure to ask about it before you choose an account provider.


What are the benefits of an HSA?

Some of the benefits that come with an HSA include pre-tax contributions, as well as tax-free growth and distributions, as long as the money is used for qualified expenses, including copays.

Additionally, the HSA rolls over at the end of the year into the following year. You can also invest a portion of your HSA for improved growth. Finally, your account belongs to you, so if you change jobs, the money remains with you.

What are the downsides of an HSA?

The main issue with HSAs is that you must meet certain requirements to contribute, including having a high-deductible health plan and not being able to make contributions after you enroll in Medicare. On top of that, there’s a 20% tax on non-qualified distributions made before age 65.

Is an HSA a good option for families?

Depending on your situation, an HSA might be a good option. If you can save on premiums on a high-deductible health plan with an HSA and use it to pay for qualified health care costs, it might be a good choice.

Carefully run the numbers, though. In some cases, if your family has a lot of health needs, saving enough to offset deductible expenses can be challenging and may be more costly than getting a different plan.

Can you cash out an HSA?

If you cash out an HSA, you will pay the accompanying penalty and taxes. However, you can cash out an HSA to roll it over into a new HSA, as long as you complete the rollover within 60 days.

Is an HSA the same as a health reimbursement arrangement (HRA)?

No, an HSA is not the same as an HRA. With an HSA, the money in the account comes from you or your employer (or both), but that money is yours and stays with you. With an HRA, the money comes solely from your employer and the account belongs to your employer.

Bottom line

An HSA can be a very valuable part of your savings (and also generate tax savings) if you contribute the maximum amount each year and try not to touch the funds until you hit retirement. If you do need to withdraw some funds, try to only use it on qualified medical expenses to avoid heavy taxes and fees.

Apart from retirement savings, an HSA can play a big role in your tax planning. Because your contributions are tax-deductible, your overall taxable income can be decreased and leave you with less federal income tax liability. If you have questions on how to best use an HSA, consider speaking with a financial advisor.


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Ben Walker, CEPF, CFEI®

Ben Walker, CEPF, CFEI®, is credit cards specialist. For over a decade, he's leveraged credit card points and miles to travel the world. His expertise extends to other areas of personal finance — including loans, insurance, investing, and real estate — and you can find his insights on The Washington Post, Debt.com, Yahoo! Finance, and Fox Business.

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Elizabeth Rollins

Elizabeth Rollins has degrees in literature and business, and she's combined these loves into a career in writing about personal finance. Her special areas of interest are debt, value, budgeting, education, and retirement.