Health Savings Account (HSA): What is it, and how do they work?
Discover more about a Health Savings Account, or HSA, what they are, how they work, and the pros and cons of having one.
Summary
An HSA is a tax-advantaged savings account that helps pay for medical costs.
You’re eligible to contribute to an HSA when you’re covered by a high-deductible health insurance plan (HDHP).
Funds from your HSA can be used to cover qualified medical expenses only.
Unbiased can connect you with a financial advisor who can help you make confident financial decisions about your future.
What is a Health Savings Account (HSA)?
A Health Savings Account, or HSA, is a tax-advantaged savings account that lets you set aside money to pay for medical costs.
Here, you can put away money and withdraw it tax-free if it is used to pay for qualified medical expenses.
To set up an HSA, you must be enrolled in a high-deductible health insurance plan (HDHP) as defined by the government and meet their eligibility requirements.
These include:
You are covered under a high-deductible health plan
You have no other health coverage except what is permitted
You are not enrolled in Medicare
You are not claimed as a dependent on someone else's tax return
How does an HSA work?
As long as you meet the above qualifying criteria, you can open an HSA.
In some cases, your employer may offer an HSA alongside an HDHP. However, if they don’t, you can open a separate account.
An HSA can be opened at certain financial institutions, including a bank, an insurance company, or anyone already approved by the Internal Revenue Service (IRS) to operate IRAs.
Anyone can contribute to your HSA, including household members, friends, and employers.
If you have an HSA through your workplace, you can set up automatic contributions directly from your wages.
Any money you do not use in a given tax year is carried over to the next year without penalty.
How much should I contribute to my HSA?
Each year, the IRS states contribution limits for HSA plans, detailing the maximum amount of money you can contribute to your plan in a given year.
These limits vary based on your plan type (self-only coverage or family coverage) and your age – those over 55 can take advantage of catch-up contributions to their own account. Unfortunately, these catch-up contributions cannot be made to a family account.
Below is the 2024 HSA contribution limit:
| Self-only coverage | Family coverage | |
|---|---|---|
| HSA contribution limit | $4,150 | $8,300 |
| HSA catch-up contribution limit | $1,000 |
How much you decide to contribute to your HSA should be based on your budget and how much you can afford to pay in
If you’re unsure about how to manage your finances, a financial advisor can help. They will work with you to create a financial plan and budget that works for you and your family.
What can I use my HSA for?
As mentioned, your HSA can be used to pay for medical expenses such as deductibles, copayments, coinsurance, over-the-counter drugs, and other qualified medical expenses not covered by your plan.
According to the Centers for Medicare & Medicaid Services government website, the money you contribute to your HSA can be used for out-of-pocket medical expenses, including:
Acupuncture
Ambulance costs
Doctor visits
Hearing aids
Prescription drugs
Psychological therapy/psychiatric care
Qualified long-term care services
In some cases, your HSA can also be used to pay for your spouse's or dependent's medical costs.
While your HSA cannot be used to pay for insurance premiums, there are some exceptions.
Your HSA funds can be used to pay for premiums if you receive unemployment payments or your health coverage was purchased under COBRA.
If you choose to use your HSA to pay for non-qualified medical expenses, you will be subject to income tax and have an additional 20% tax penalty. Once you turn 65, this penalty is withdrawn.
To learn more about HSA withdrawal rules, click here.
What are the pros and cons of an HSA?
HSAs have several advantages and disadvantages. It’s best to consider these before you decide to open an account.
Some of the advantages associated with an HSA include:
Tax-free contributions and withdrawals – All contributions you make to your HSA are tax-free, and any money you withdraw to pay for qualified medical expenses is also tax-free. As mentioned, if you use your HSA funds to pay for anything other than medical expenses, you will have to pay tax.
Tax-free growth – Your HSA funds can be invested in various investment tools, potentially allowing for higher returns; any growth is tax-free.
Employer contributions – If your employer chooses to, they can also contribute to your HSA. This does not have to be matched, and the contribution is counted towards your annual limit.
Money is rolled over – The money in your HSA does not expire and can be rolled from one year to the next. It stays in your account until you use it.
Some of the disadvantages of HSAs include:
Need an HDHP – In order to qualify for a HSA, you need to have a high-deductible health plan. An HDHP is a lower premium health insurance with a higher minimum deductible than traditional health plans. This means you must pay for medical expenses up to a certain limit before insurance kicks in.
The bottom line
As you get older, medical expenses increase, and healthcare can quickly become very expensive.
HSAs are a great tax-advantaged way to save money, and by starting one early, if you meet the requirements, you can build up a nest egg of money to go towards your health-related expenses.
Planning your financial future can be hard work, but it doesn’t have to be.
By working with a financial advisor, you can get expert guidance on managing your money and saving for your future, taking advantage of their in-depth financial knowledge and putting your money to work.
Unbiased with an independent SEC-regulated financial advisor who will help you meet your financial goals. Simply fill out a two-minute questionnaire and connect with an advisor in as little as 48 hours.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.