The Fineprint
Why You Need a Health Savings Account (HSA)
What is a Health Savings Account?
A Health Savings Account (HSA) is an account that can be used to pay for qualified medical expenses such as copays, prescriptions, glasses or contacts, dental care, and more, provided that you have an HSA-eligible health plan. This account is tax-advantaged, as it offers multiple ways to save on taxes, making it more advantageous than retirement benefits, constituting HSA an essential account for long-term financial planning. It is also important to note that HSA contributions limits for 2026, which are $4,400 for self-coverage and $8,750 for family coverage, allowing individuals to manage their contributions effectively.
Benefits of a HSA
Save on Taxes
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You reduce taxable income while using this account because the contributions are not taxed while held within an HSA.
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If HSA funds are used for qualified medical expenses, you will not owe taxes upon withdrawal. This is why HSAs are often considered more tax advantageous than accounts like 401(k)s, which use pretax dollars but still require taxes to be paid upon withdrawal.
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Although HSAs typically use pretax dollars for medical expenses, you may also fund your HSA using post-tax dollars and later take a tax deduction when filing your personal taxes.
Employer Contributions
Approximately 84% of employees covered by an HSA-eligible health plan receive employer contributions, according to Fidelity. This indicates that you may receive additional funds when contributing to your account, allowing you to build a substantial nest egg that can be valuable later in life. Note that the funds in the account belong to you. Even if your employer no longer offers an HSA or you leave your job, you retain ownership of the account.
You may also open a limited purpose Flexible Spending Account (FSA) with employer approval, as HSA holders are permitted to have a limited purpose FSA for qualified dental and vision expenses. This provides added flexibility in managing both current and future medical costs. For example, you may use an HSA to save up for future medical expenses while using an FSA to cover current ones.
Retirement Benefits
There is a 20% penalty, in addition to income tax, for using HSA funds for non-qualified medical expenses. However, once you reach the age of 65, this penalty is removed, although income tax will still apply. Moreover, you are never required to withdraw funds from your HSA, providing flexibility in retirement income planning.
For example, if your spouse is the beneficiary of your HSA upon passing, they may transfer the finds into an HSA in their own name. However, if a non-spouse inherits your HSA, the funds will be distributed to them and taxed as income.
No "Use-It-or-Lose-It" Rule
Unlike some other accounts, you do not lose unused funds at the end of the year. Instead, the balance rolls over indefinitely until you choose to use it. When combined with the ability to invest HSA funds, this allows your saving to grow through compound interest, meaning your returns accumulate and increase over time.
How to Open an HSA
Step 1 : Ensure you are eligible
To be eligible for a Health Savings account, the following conditions must be met:
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You cannot be covered by a non-HSA-eligible health plan through a spouse or parent.
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You cannot be enrolled in Medicare.
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You cannot be claimed as a dependent on another individual's tax return.
You must also be enrolled in an HSA-eligible high-deductible health plan that meets necessary requirements. If you are unsure about your eligibility, consult your benefits administrator to confirm that your plan qualifies.
Step 2: Pick an HSA provider
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If you plan to invest in your HSA funds, select a provider that requires little to no minimum balance to remain uninvested in cash. This enables you to invest all your money in the account to maximize your gains from compounding returns.
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You should also research if any potential HSA providers offer low-cost funds or automated investing options, such as robo-advisors, that align with your financial goals. Robo-advisors manage and allocate investments based on your risk tolerance and objectives.
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You may also want to compare fees across different providers to ensure you are selecting the most suitable option. Keep in mind that you retain the flexibility to change your HSA provider, even if you are no longer covered by an HSA-eligible health plan.
Step 3: Invest your HSA
If you intend to use an HSA for long-term medical expenses, do not forget to set up your investments. According to Fidelity, only 21% of participants invest their HSA assets, suggesting that most Americans are not taking advantage of this valuable wealth building tool as well as they could because you could have significantly more gains if you invested, when with minimal risk on your portfolio.