Should I Get a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a savings account designed to help individuals save and pay for qualified medical expenses. It is a tax-advantaged financial tool for managing healthcare costs now and in the future. HSAs are paired with a specific type of health insurance plan.

Understanding HSA Eligibility

Eligibility for an HSA requires enrollment in a High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The plan’s out-of-pocket maximums cannot exceed $8,300 for self-only coverage or $16,600 for family coverage, as outlined in IRS guidelines.

Several factors can disqualify an individual from contributing to an HSA, even with an HDHP. Being covered by another non-HDHP health plan, such as a traditional low-deductible plan, makes one ineligible. Enrollment in Medicare or TRICARE also disqualifies an individual from making new HSA contributions.

Being claimed as a dependent on someone else’s tax return also prevents an individual from contributing to an HSA. Having received Veterans Administration (VA) benefits within the past three months can affect eligibility, though exceptions exist for service-connected disabilities.

Key Features of an HSA

HSAs offer distinct characteristics that make them a valuable financial tool. The primary advantage is their “triple tax advantage”: contributions are tax-deductible, investment growth is tax-free, and qualified withdrawals are tax-free. Contributions made through payroll deductions can also bypass FICA taxes, increasing tax savings.

Beyond the tax benefits, HSAs have investment potential. Once a certain cash balance is maintained, typically a threshold set by the custodian, funds can be invested in various options, such as mutual funds or exchange-traded funds (ETFs). This allows funds to grow over time, similar to a retirement account, with earnings not subject to federal income tax.

HSA funds can be used for qualified medical expenses, such as deductibles, copayments, prescriptions, vision, and dental care. The IRS provides a comprehensive list of qualified medical expenses. Funds can be used for current needs or saved and invested for future healthcare costs, including retirement.

HSAs are portable. The HSA belongs to the individual, not the employer or health plan. The account remains with the individual through job changes, plan changes, or retirement, ensuring continuous access.

Managing Your HSA Funds

Effectively managing an HSA involves understanding how to contribute funds and how to make withdrawals. Contributions can be made in several ways, including through pre-tax payroll deductions from an employer, or direct contributions to the HSA provider. Employer contributions, if offered, count towards annual limits.

The IRS sets annual contribution limits for HSAs, which vary based on coverage type. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300, while those with family HDHP coverage can contribute up to $8,550. An additional “catch-up” contribution of $1,000 is permitted for individuals aged 55 and over.

When using HSA funds, withdrawals must be for qualified medical expenses to maintain tax-free status. These include medical, dental, and vision care services and products. Account holders should document all medical expenses and retain receipts for tax purposes, as the IRS may require verification.

Withdrawals for non-qualified expenses before age 65 are subject to income tax and an additional 20% penalty. After age 65, withdrawals for any purpose are subject only to income tax, with no penalty. Many HSA custodians also provide investment options, allowing account holders to move funds beyond a cash threshold into various investment vehicles to grow their savings.

Opening and Maintaining an HSA

Opening an HSA typically begins with finding a suitable provider. Many open an HSA through their employer’s provider, particularly if the employer contributes. HSAs can also be opened directly with banks, credit unions, or specialized custodians. Consider factors such as fees, investment options, and customer service.

The account setup process involves completing an application and linking it to the qualifying HDHP. Providing personal information, such as Social Security Number and contact details, is standard. Some providers may require initial funding.

Maintaining an HSA requires compliance with IRS rules, especially regarding contribution limits and qualified medical expenses. Account holders are responsible for accurate tax reporting, including receiving Form 1099-SA for distributions and Form 5498-SA for contributions. These forms report HSA activity to the IRS.

Diligent record keeping is important for HSA owners. Maintain thorough records of all medical expenses for which HSA funds are used, even if not immediately reimbursed. These records serve as proof of qualified expenses in case of an IRS audit and substantiate tax-free withdrawals.