Written By: Carolyn Mullins
Understanding Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a special savings account that provides tax advantages when you use it to pay for qualified medical expenses. To be able to contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). These plans usually have lower monthly premiums, but higher deductibles.
How HSAs Work
You can contribute to an HSA through your employer, where the money is taken out of your paycheck before taxes. Some employers even contribute money for you. If your employer does not offer one, and you are eligible, you can open an HSA at most major financial institutions such as Fidelity or Charles Schwab.
It is important to know that the IRS sets a maximum amount you can contribute each year, and this limit is a total amount between you and your employer. For example, the 2026 limit (self-only coverage) is $4,400. If your employer contributes $1,000, you can contribute $3,400.
The money in your HSA can be invested to grow over time. Both your contributions and any investment earnings can be withdrawn tax-free if used for qualified medical expenses. Qualified medical expenses include a wide range of items and services such as hospital visits, doctors, dental care, physical therapy, long-term care services, menstrual products, over-the-counter medications, hearing aids, and more.
HSA vs. FSA
HSAs are often confused with Flexible Spending Accounts (FSAs). The key difference is that FSAs are generally “use it or lose it” within the plan year. HSAs are not. Your HSA balance rolls over from year to year. It stays with you even if you change jobs, change health insurance, or are no longer enrolled in an HDHP. Once the money is in your HSA, it is yours to keep.
You will never pay taxes on the money you put into your HSA or that is earned in the account as long as it is used for qualified medical expenses.
The Triple Tax Advantage
- Contributions are tax-free. You do not pay taxes on the money you put in.
- Growth is tax-free. If you invest your HSA funds, any growth or interest is not taxed.
- Withdrawals are tax-free when used for qualified medical expenses.
No other financial tools offer tax benefits when you contribute, when the money grows, and when you take the money out. This is why HSAs are considered such a high priority savings vehicle. The government places contribution limits on HSAs because they are so tax advantageous.
What is the Catch?
There really isn’t one, as long as you use the funds for qualified medical expenses. If funds are withdrawn before age 65 for anything other than qualified expenses, they are subject to income tax and a 20% penalty. After age 65, you can use HSA funds for non-medical expenses without the penalty. In that case, you simply pay regular income tax, similar to a traditional IRA. If the money is used for medical expenses, it remains tax-free.
Long-Term Growth Potential
Many HSAs allow you to invest your money in mutual funds. If you can pay your healthcare costs out of pocket now and leave your HSA funds untouched, your balance can grow over many years. This can create a valuable pool of tax-free money for healthcare expenses later in life, including retirement.
One of the powerful features of an HSA is that you can pay for medical expenses out of pocket now and reimburse yourself years later. Just be sure to keep your receipts for qualified expenses. This strategy allows your HSA to continue growing tax-free while still giving you flexibility to cover past medical costs at any time.
If You Ever Lose Eligibility
If you move off a High Deductible Health Plan later, you simply stop contributing new money to the HSA. The account stays open, and you can continue to save the amount in the account and use the funds whenever needed. Nothing is lost.
Don’t Die with an HSA
If your HSA passes on to your spouse upon your death, your spouse may use the account as their own and continue the tax savings.
If your HSA passes on to a non-spouse upon your death, the account balance becomes taxable income to the beneficiary immediately. However, your estate may pay your final medical expenses with your HSA after your death.
Conclusion
Health Savings Accounts offer flexibility, long-term benefits, and the best tax advantages available. Whether you use the funds for today’s medical bills or allow the account to grow for the future, contributing to an HSA is often a smart and practical step toward financial stability.
If you are eligible for an HSA, contributing even a small amount each year can make a meaningful difference over time.
Have additional questions regarding a Health Savings Account (HSA)? Connect with our team at Twelve Points today!