Orlando Harmon
A Health Savings Account (HSA) is a tax-exempt savings account that can be used to pay for qualified medical expenses. To open an HSA, you must be enrolled in a qualified high-deductible health plan (HDHP) and not be claimed as a dependent on someone else's tax return. You can contribute to an HSA on a pre-tax basis, and the funds can be used to pay for deductibles, copayments, and coinsurance. HSAs may also earn interest, which is not taxed. Once you turn 65, you can use the money in your HSA for anything without penalty.
| Characteristics | Values |
|---|---|
| Type of account | A tax-exempt savings account |
| Use | To pay for certain medical expenses |
| Tax | Money goes in and comes out tax-free |
| Eligibility | Covered under a high-deductible health plan (HDHP); not covered under any other non-HDHP health coverage; not claimed as someone else's dependent on their tax return |
| Funding | No income restrictions; annual contribution limits |
| Interest | Interest earned is not taxed |
| Rollover | Balance rolls over from year to year |
| Retirement | After turning 65, funds can be withdrawn for any reason without penalty |
| Use with other accounts | Can be used with a general-purpose health flexible spending account (FSA) |
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What You'll Learn
HSA eligibility
To be eligible for a Health Savings Account (HSA), you must be enrolled in a High Deductible Health Plan (HDHP), have no other insurance coverage except those specifically allowed, and not be claimed as a dependent on someone else's tax return. Some examples of other coverage that would cause ineligibility include a health care flexible spending account (HCFSA), a spouse's FSA, a spouse's family enrollment in an HMO, other non-high-deductible health insurance coverage, TRICARE, Medicare, or receipt of VA or IHS healthcare benefits within the previous three months.
You can set up an HSA with a qualified HSA trustee, which can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. No permission or authorization from the IRS is necessary to establish an HSA. Your employer may have information on HSA trustees in your area.
Once you have an HSA, you can contribute to it as long as you remain an eligible individual. You can deduct the amount you deposit in an HSA from your taxable income, and unspent HSA funds roll over from year to year. You can generally claim a tax deduction for contributions you or someone other than your employer makes to your HSA, even if you don't itemize your deductions. HSA funds are invested, and the interest is tax-free. However, if you withdraw money from your HSA for anything other than qualified health expenses, it will be subject to income tax and, if you are under 65, an additional 20% tax penalty.
Qualified medical expenses include some dental, drug, and vision expenses, as well as insulin, glucose meters, genetic testing, guide dogs for the impaired, and more. You can find a list of qualified medical expenses on the IRS website.
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Using an HSA with medical insurance
A Health Savings Account (HSA) is a tax-exempt savings account that can be used to pay for certain medical expenses. To use an HSA with your health insurance plan, you need to enrol in a qualified High Deductible Health Plan (HDHP), also known as an HSA-compatible health plan. It's important to note that not all high-deductible health plans are qualified, and these requirements can change, so be sure to check that your plan meets the criteria.
You can contribute to an HSA only if you have an HSA-eligible plan, which is typically a health plan that only covers preventive services before the deductible. Funds deposited into an HSA are not taxed, nor are withdrawals for qualified medical expenses. These expenses include deductibles, copayments, and coinsurance. HSAs may also be used to pay for certain dental, drug, and vision expenses.
It's important to know that you cannot contribute to an HSA if you have disqualifying additional medical coverage, such as a general-purpose health flexible spending account (FSA). You also cannot be claimed as someone else's dependent on their tax return. HSAs are typically offered as a work benefit, but you may still be able to open an account if your employer doesn't offer one or if you're self-employed or unemployed.
Once you create an HSA, it's yours to keep even if you leave your employer. You can continue to use your HSA balance to cover qualified medical expenses with tax-free distributions. You can also carry over your HSA funds from year to year, allowing you to build savings for future medical needs. However, six months before you retire or start receiving Medicare benefits, you must stop contributing to your HSA.
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Tax advantages
A Health Savings Account (HSA) is a tax-advantaged savings account for medical expenses like doctor visits, prescription drugs, and dental care. HSAs can be used to save for qualified medical expenses and insurance coverage under very specific rules. HSAs are intended to help users save pre-tax or tax-deductible dollars to pay for qualified medical expenses that aren't covered by insurance. HSAs offer triple-tax advantages: when money goes into the account, with potential growth, and when it comes out.
Deposits made to an HSA are tax-deductible, and they lower your overall taxable income. The money deposited into the HSA is not subject to federal income tax when the deposit is made. Contributions made to an HSA through payroll deductions are excluded from your gross income. Additionally, contributions made to your HSA by your employer may be excluded from your employment taxes. HSA contributions can be invested over time, and the interest earned in the account is tax-deferred, meaning the funds grow without being subject to taxes unless they are used for non-eligible medical expenses.
Withdrawals from an HSA are tax-free for eligible medical expenses, including deductibles, copays, prescriptions, vision, and dental care. Distributions used to pay for or reimburse eligible medical expenses are not taxed, provided they are for expenses incurred after establishing the HSA. However, if funds are withdrawn for non-medical purposes, they are taxed as regular income, and a 20% tax penalty may apply. Once you turn 65, you can withdraw money from your HSA for any reason without penalty, but you will owe income tax on the withdrawal if it is used for non-medical expenses.
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HSA investment options
Health savings accounts (HSAs) are not only a tax-smart way to pay for your current health care needs, but they can also be used for saving and investing for retirement. HSAs are prized for their triple tax advantages: contributions are tax-deductible, earnings are tax-free, and withdrawals are tax-free when used for qualified medical expenses.
If you are investing through an HSA, you can choose and manage your own investments, which can include stocks (including fractional shares), bonds, ETFs, mutual funds, and more. Alternatively, you can choose from a provider's pre-selected funds.
- Fidelity Go HSAs: These are intended for investing goals of 3 years or longer. You can reimburse yourself for qualified medical expenses you pay out of pocket by submitting a withdrawal request. After the money has settled, it can be sent to you by check, electronic funds transfer (EFT), or transfer of funds to another account.
- Fidelity HSA Funds: These are pre-selected funds that you can choose from. There is no minimum balance required to start investing. However, certain mutual funds may have minimum investment requirements.
- HealthEquity: This is a solid, low-cost HSA provider that does not levy a maintenance fee. It pays interest rates of up to 0.40% on balances greater than $10,000. While its 0.31% charge on investment accounts is higher than the average, its lineup of cheap Vanguard strategies makes up for the difference.
- HSBAs (Health Savings Brokerage Accounts): If you feel that your investment choices are limited with your HSA provider, you can consider opening an HSBA. Most HSBAs offer a wider selection of investments and different levels of investment management. You can choose a self-directed account if you are a more seasoned investor, or you can have an investment advisor manage your portfolio.
- HSA Invest: This option offers three investment choices: Choice, Select, and Managed. These options give you thoughtfully chosen securities that are aligned with your HSA and financial objectives. You can enroll in more than one option. Choice has an annual fee of 0.10%, Select has an annual fee of 0.25%, and Managed has an annual fee of 0.35%.
- Saturna's HSA: This option has a low interest rate of 0.05% to 0.20% for accounts under $50,000, and a $30 maintenance fee. Participants can begin investing once their balance reaches $500.
- UMB's HSA: UMB has improved its offering by eliminating its $35 maintenance fee. Its investment menu now has 40-plus options, including Vanguard's target-risk and Target Retirement series. It also offers a solid environmental, social, and governance option in Gold-rated Parnassus Core Equity PRILX.
It's important to note that investing through an HSA may not be for everyone. Participants must be on a high-deductible plan to be eligible for an HSA, which may not suit everyone's needs. Additionally, it's always a good idea to consult with a financial advisor to determine the best investment options for your specific situation.
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HSA-eligible expenses
A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. To be eligible for an HSA, you must meet specific requirements, including being covered under a high-deductible health plan (HDHP) and having no other health coverage. HSAs can be great cost-saving tools, and you can use them to reimburse yourself for eligible healthcare, dental, and dependent care expenses.
Some specific examples of HSA-eligible expenses include:
- COBRA premiums
- Medical coinsurance amounts and deductibles
- Diabetic education and nutritional counselling
- Expenses for a doula whose primary purpose is for the delivery of an infant
- Acupressure (may require a Letter of Medical Necessity from a medical professional)
- Adaptive equipment reimbursement
- Transportation to Alcoholics Anonymous (AA) meetings
- Home testing for COVID-19 and personal protective equipment (PPE) to prevent the spread of COVID-19
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Frequently asked questions
A Health Savings Account (HSA) is a tax-exempt savings account that, when paired with a qualified high-deductible health plan (HDHP), can be used to pay for certain medical expenses.
To use an HSA with your health insurance plan, you need to enroll in a qualified HDHP, also known as an HSA-compatible health plan. The Internal Revenue Service (IRS) defines what makes a plan qualified. These requirements can change, so be sure to check that your high-deductible plan is a qualified one.
You can use your HSA to pay for qualified medical, dental, drug, and vision expenses. You can make purchases directly from your HSA account using a healthcare debit card, ACH, online bill-pay, or check. Alternatively, you can pay out of pocket and reimburse yourself from your HSA.
