Summary
- A Health Savings Account (HSA) is a special savings account for funds intended to be saved for and ultimately spent on eligible medical expenses
- HSAs are triple-tax-advantaged accounts
- To open and contribute to an HSA you must be enrolled in a High Deductible Health Plan
- There are limitations to how much you can contribute to an HSA and what you can purchase with withdrawn funds
- HSAs are portable – the funds are yours for life!
Health Savings Accounts – The Basics
A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for individuals with high-deductible health plans (HDHPs) to save and pay for qualified medical expenses. The appeal of an HSA is that it offers triple tax benefits:
- Contributions are tax-deductible (or made pre-tax if through your employer).
- Earnings grow tax-free.
- Withdrawals for qualified medical expenses are also tax-free
HSA Eligibility
To open and contribute to an HSA, you must meet the following criteria:
- Be enrolled in a High-Deductible Health Plan (HDHP): For 2024, an HDHP is defined as a health plan with a minimum deductible of $1,600 for individuals or $3,200 for family coverage, and a maximum out-of-pocket limit of $8,050 for individuals or $16,100 for families.
- Not be enrolled in Medicare: Once you turn 65 and enroll in Medicare, you can no longer contribute to your HSA, but you can still use the funds in your account.
- Not be claimed as a dependent on someone else's tax return.
- Not be covered by any other non-HDHP health insurance: Having coverage through a spouse or parent’s non-HDHP plan or another healthcare option can disqualify you, even if you are also enrolled in an otherwise eligible HDHP.
Key Features of an HSA
When you contribute to your HSA, the funds can be withdrawn for a variety of qualified medical expenses, including:
- Doctor visits
- Prescription medications
- Dental and vision care
- Some over-the-counter drugs and medical supplies
HSA funds can also be used to pay for health insurance premiums but only in certain cases, like COBRA coverage, long-term care insurance, or health insurance during periods of unemployment.
You can also utilize your HSA funds for qualified medical expenses of your tax dependents, even if they aren’t enrolled in an HDHP.
Another great feature of HSAs is their portability—you own the account, not your employer. This means the account stays with you, regardless of job changes, and the money remains available to you throughout your life. The funds you place in an HSA account never expire, and you can invest the funds. The funds are yours to use on qualified medical expenses for the rest of your life!
Remember, you must be enrolled in an HDHP to contribute to your HSA, but you don’t have to be enrolled in an HDHP to make withdrawals for qualified medical expenses – more on this later!
Contributing to Your HSA:
You can contribute up to the annual IRS limit into your HSA in any given year. For example, in 2024, the annual contribution limits are as follows:
- $4,150 for individuals with self-only HDHP coverage.
- $8,300 for families with family HDHP coverage.
Additionally, if you're 55 or older, you can contribute an extra $1,000 as a "catch-up" contribution.
If your HDHP is tied to your employment, it’s possible that your employer will make contributions to your HSA on your behalf. These contributions do count toward the annual limit, so be sure to take them into account when deciding how much to contribute yourself.
Remember that, if you cease to be covered by a HDHP, you can no longer make contributions to your HSA! The amount you can contribute will be prorated by the number of months you had HDHP coverage. There is a special rule, called the ‘last-month rule’ that can be an exception, but it’s technical and we suggest that you consult with a tax or insurance professional to see if you qualify.
Non-Qualified Expenses
If you withdraw money from your HSA and spend it on something other than qualified medical expenses, you'll face a 20% penalty, plus you'll have to pay income taxes on that withdrawal.
HSA as a Long-Term Investment Tool
Often, people enrolled in a HDHP use the funds contributed to their HSA to offset medical costs incurred while enrolled in that HDHP. However, if you don’t incur many medical costs in that timeframe, an HSA can also be a valuable long-term savings tool. If you don't need to use your HSA funds for immediate healthcare expenses, you can invest your HSA balance in mutual funds, stocks, and other investment options (depending on your HSA provider).
Since the account grows tax-free, many people choose to invest their HSA savings and let them accumulate for retirement, when healthcare costs are likely to be higher. At age 65, HSA funds can also be used for non-medical expenses without incurring the 20% penalty, though you'd still pay income tax on withdrawals for non-qualified expenses.
Resources
- The HSAStore is an online retailer where everything for sale is HSA eligible
- Publication 502 is the IRS publication listing HSA eligible expenses