A health savings account (HSA) can help you plan for and manage healthcare costs. It’s a beneficial tool for improving your finances now and in the future. HSAs can pay for qualified medical expenses while reducing your taxable income and contributing toward your retirement.
What Is a Health Savings Account?
An HSA is defined as a type of personal savings account. You can make pre-tax contributions and use the money to help pay for certain medical costs. Your employers can also contribute. You must stay within yearly contribution limits, which for 2025 are $4,300 for self-coverage and 8,550 for a family plan.
How It Works
You need to be enrolled in an HSA-eligible plan to set up an account. These high deductible health plans (HDHP) have lower monthly premium costs but require you to pay more for medical services out-of-pocket before your insurance kicks in. The HSA functions as a cushion of extra cash to offset the higher deductible.
An HSA lets you deposit money into your account and withdraw it any time you require funds to help pay for your medical expenses. Qualified withdrawals are tax-free, but withdrawals for non-qualified expenses will incur tax and a 20% penalty.
What It Covers
HSAs typically pay for:
- Ambulance costs
- Copayments
- Coinsurance
- Deductibles
- Hearing aids
- Therapy
- Long-term care
It may also cover some of the following:
- Dental work
- Prescription medications
- Vision expenses
Remember that you can’t use your HSA to pay for plan premiums. You also can’t contribute to an HSA if you sign up for Medicare.
Benefits of a Health Savings Account
The many HSA benefits these plans provide make them an excellent choice for those who qualify.
You Own the Account
Unlike employer-dependent health care plans, you are the sole owner of your HSA account, so it moves with you if you change jobs or retire. You can even open multiple HSAs for different purposes, like one for paying medical costs and one for investing.
Tax Advantages
The money you deposit into your HSA isn’t taxed, but this isn’t the only tax advantage. Interest the account earns, and qualified withdrawals are also tax-free.
Make contributions easy by setting up pre-tax payroll deductions. Designate the amount you wish to transfer to your HSA each pay period, and the money is taken out before federal taxes apply. This is a good way to get the most out of every dollar. Plus, payroll deductions offer further tax advantages by exempting you from paying Medicare and Social Security taxes. If, instead, you choose to contribute after-tax dollars, you could qualify for a deduction when you file your taxes.
Invest Your HSA Balance
If you wish to grow your account further, then set up an investment account. You have the choice to purchase stocks, bonds, and other assets to expand your investment portfolio and increase your returns.
Flexible Spending Options
Use your HSA for current and routine healthcare costs and to save for the future. Health savings accounts are there for your short-term needs and long-term goals. Growing your balance is a smart strategy for extra funds in your retirement years.
No Expiration Dates
The money in your HSA account doesn’t expire. If you don’t use the funds by the end of the year, the money rolls over into the following year and continues to do so for the entirety of your life. If you consistently contribute and invest your money wisely, you could build a sizeable sum for healthcare costs in your later years. You also have the option to name a beneficiary on your account to receive the balance in the event of your death.
Use for Any Medical Expense At Age 65
After you turn 65, you can take funds out of your HSA for non-medical costs without penalty. However, non-medical withdrawals are subject to federal income tax. If you enroll in Medicare, you must stop adding money to your HSA, but you can still withdraw from the balance at any time.
Share With Qualified Family Members
In some cases, you can use the funds in your Health Savings Account to pay for qualified expenses for your spouse and dependents.
Use In Combination With Other Health Accounts
Another upside to a health savings account is that you can use it alongside other healthcare expense accounts, like a flexible spending account (FSA) or a health reimbursement arrangement (HRA). An FSA can be used with any healthcare plan, but the funds must typically be used within the year. An HRA is known as an employer-funded account that helps to offset medical care costs. If you use the money in your FSA or HRA for immediate expenses, you can save the money in your HSA for future use.
You can open an HSA at most banks, credit unions, or other financial institutions. You will need to pick your preferred HSA provider that offers the features most appealing to your situation and goals and choose between single coverage or family coverage. You must stay within yearly contribution limits, which for 2025 are $4,300 for self-coverage and 8,550 for a family plan. Always keep your receipts and detailed records when you pay for medical expenses with your HSA.
If you have a high deductible health plan, then opening a health savings account is often a worthwhile decision. Not only will you have a fund to help you pay for out-of-pocket health expenses, but you can use it to build wealth for future medical costs and take advantage of the tax benefits to make the most out of your paycheck.
You might also be interested in: Money Management Strategies for Gig Workers
