Who Can Benefit from Health Savings Accounts (HSAs)?

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In today's complex healthcare landscape, managing medical expenses can be a challenge. Health savings accounts (HSAs) can be a powerful financial tool to help individuals with high deductible health plans (HDHPs) effectively save for qualified medical expenses while enjoying significant tax advantages.

Here’s what you need to know:

What is a health savings account?

At its core, a health savings account is a tax-advantaged savings account designed specifically for individuals with high deductible health plans. It serves to set aside funds for qualified medical expenses, providing both short-term financial relief and long-term savings potential.

What sets HSAs apart is their triple tax advantage: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are also tax-free.

Who can contribute?

Generally, anyone under the age of 65 can open and contribute to an HSA, assuming they meet the eligibility criteria including:

You’re enrolled in an HDHP.
You’re not enrolled in a plan sponsored by your partner or parent that isn’t HSA-eligible.
You’re not enrolled in Medicare.
You cannot be claimed as a dependent on someone else’s tax return.

What are the tax benefits?

Opening an HSA has unique tax benefits that can go a long way to helping you fund your medical care.

Paycheck deductions: The direct contributions made from your paycheck are not subject to federal income tax. By reducing your taxable income, you effectively lower your overall tax burden.
Tax-deductible contributions: When you contribute money to an HSA outside of your paycheck, the amount you contribute is considered a tax deduction. This means that the money you contribute to the HSA is deducted from your taxable income for that year. As a result, you reduce your overall tax liability, potentially lowering the amount of income tax you owe.
Tax-free withdrawals for qualified medical expenses: The most significant advantage of HSAs is that you can make tax-free withdrawals from the account for qualified medical expenses.

There are annual contribution limits set by the IRS, which vary depending on whether you have individual or family coverage. For 2023, the limit for an individual is $3,850. Those with a family plan can contribute up to $7,750.

What medical expenses qualify?

A health savings account offers a range of options for utilizing your funds. You can use the money in your HSA to pay for qualified medical expenses , including:

Doctor's visits
Prescription medications
Dental care
Vision care

HSA funds can also cover eligible expenses for your spouse and dependents, even if they are not covered under your HDHP. Certain over-the-counter medications and healthcare products are now eligible for HSA reimbursement as well.

Funding a health savings account

You have several funding options to help you build your HSA.

Automatic paycheck withdrawals: If your employer offers an HSA as part of your benefits package, you can set up automatic paycheck withdrawals. This means that a portion of your salary is deducted before taxes are calculated, and the money is directly contributed to your HSA.
Individual contributions: Even if you don't have the option of automatic paycheck withdrawals, you can make contributions to your HSA on your own. You can deposit funds into your HSA from your personal savings or checking account. While these contributions are not deducted from your pre-tax income, they still offer the benefit of tax-free growth and tax-free withdrawals for qualified medical expenses.
IRA rollover: If you have an individual retirement account (IRA), you have the option to perform a one-time rollover from your IRA to your HSA. This rollover allows you to transfer funds from your IRA into your HSA without incurring any tax penalties or early withdrawal fees. However, it's important to note that there is a maximum limit on the amount you can rollover each year, based on the annual HSA contribution limits.
Employer contributions: Some employers may contribute to their employees' HSAs as an additional benefit. The employer can choose to match a portion of the employee's HSA contributions or opt for a fixed contribution regardless of the employee's contributions. This option is typically tax-free for both the employer and the employee.

Using your funds

You can use your HSA for qualified medical expenses at any time. Withdrawing funds for non-qualified medical expenses before the age of 65 may result in penalties and taxation.

HSAs offer an interesting benefit for retirement planning. After reaching the age of 65, you can withdraw funds from your HSA for any reason without incurring a penalty. However, if the withdrawals are not used for qualified medical expenses, they will be subject to regular income tax. Essentially, once you reach retirement age, your HSA can function similarly to a traditional retirement account, providing an additional source of funds to supplement your retirement income.

This aspect of HSAs can be particularly advantageous for individuals who are generally healthy and have accumulated a significant balance in their HSA. It allows for more flexibility in using the funds for various purposes during retirement, such as covering living expenses, travel or other non-medical expenses—as long as you’re aware of (and prepared for) the taxes you may incur.

Rolling over your health savings account

One of the key advantages of health savings accounts is their long-term viability as a savings tool. Unlike some other healthcare savings accounts, HSAs do not have a "use it or lose it" policy. This means that any funds you contribute to your HSA remain in the account and roll over from year to year, regardless of whether you use them for medical expenses. This feature allows you to build up a cushion of savings over time.

The ability of funds to roll over is particularly valuable because it allows you to accumulate savings for future healthcare expenses. As medical costs can be unpredictable and may increase as you age, a growing HSA balance can provide financial security and peace of mind.

Investing your health savings account funds

Once your health savings account balance reaches a certain threshold, typically set by your HSA provider, you may have the option to invest your funds. This means that instead of keeping your HSA balance in a standard savings account, you can choose to allocate a portion of it toward various investment options.

By investing your HSA balance, you have the potential to grow your savings over time. Investment options within HSAs can vary depending on your HSA provider, but they often include a range of choices such as mutual funds, stocks, bonds or other investment vehicles. The specific investment options available to you will depend on the offerings and restrictions set by your HSA provider.

It's important to note that investing your HSA funds carries certain considerations and limitations. Here are a few factors to be aware of:

Minimum balance requirements: Your HSA provider may require a minimum balance in your account to ensure that you maintain enough in the savings portion of your HSA to cover any immediate or short-term medical expenses.
Investment restrictions: Your HSA provider may impose restrictions on the types of investments you can choose.
Risk and returns: Investing always carries a degree of risk, and the performance of your investments can fluctuate over time.
Fees: Some HSA providers may charge fees for investment services or transactions. It's important to review and understand the fee structure associated with investing your HSA funds.

When considering whether to invest your HSA funds, consult with a financial expert who can provide personalized guidance based on your specific financial situation and goals. They can help you assess the investment options, risks and potential returns associated with investing your HSA balance.

What to look for when choosing a health savings account

When selecting an HSA provider, there are a few key factors to consider. Look for providers that offer low or no fees, a wide range of investment options (if you intend to invest your funds), convenient access to your funds through online platforms or mobile apps, and excellent customer service. It's also important to review the provider's reputation and track record to ensure they have a solid foundation of serving their customers.

If you have an HDHP, a health savings account can be a valuable tool to help lower the cost of your medical expenses. With both virtual and in-person appointments, your First Tech team can help you decide if an HSA is right for you—and how to put it to the best use for your future health. Set up an appointment today to learn more.

First Tech does not provide tax services. Please consult with a qualified tax professional to assess your situation. Before investing consider objectives, risks, and meet with a financial advisor.