A health savings account (HSA) helps you set money aside for health-related expenses. You might have heard the term before or read about it in your benefits package, but were unsure about what a HSA is and how it works.
Having a better understanding of HSAs may help you decide if it's a viable option for you and your needs.
How Can You Use a HSA?
You can use a Health Savings Account (HSA) to set aside pretax income for qualified health care expenses, such as:
- Prescription drugs
- Copays
- Ambulance rides
- Dental and vision care
Note: HSAs generally cannot be used to pay for health care premiums. Some banks, financial institutions, and health insurance companies offer HSAs.
HSA Eligibility
If your health insurance company offers an HSA, you must have a High-Deductible Health Plan (HDHP) to qualify. Some of the key HDHP features are:
- You’ll pay a higher deductible out-of-pocket before your insurance starts covering expenses.
- Premiums are usually lower, but the amount you pay before reaching your deductible can add up.
HDHP Minimum Deductibles (2026)
| Coverage Type | Minimum Deductible |
|---|---|
| Individual | $1,7001 |
| Family | $3,4001 |
How Does a HSA Work?
Before opening a Health Savings Account (HSA), it helps to understand how it operates. Many health care providers offer HSAs. If yours doesn’t, you can usually open one on your own. If you qualify and decide to contribute, keep in mind there are maximum yearly limits:
| Coverage Type | Maximum Yearly Limits |
|---|---|
| Individual | $4,4001 |
| Family | $8,7501 |
You might be offered an HSA through your employer. If so, check whether you can:
- Contribute through automatic payroll deductions
- Take advantage of employer contribution plans included in your benefits package.
Your HSA is yours to keep. It’s not tied to a specific insurance plan or employer, and you can continue contributing even if you’re retired and under 65.
When it comes time to put your HSA savings to use, most plans will give you a debit card that's linked to your account to pay for your qualifying medical expenses.
HSA Advantages, Tax Benefits & Withdrawals
There are a few other important points to keep in mind when considering your Health Savings Account (HSA) options.
Annual Rollovers: One major advantage of an HSA is that your contributions roll over each year, even if you don’t use the funds. Your balance continues to grow and stays available for future qualified medical expenses.
Contributions and Medicare: Once you reach age 65 and enroll in Medicare, you can no longer contribute to your HSA. However, you can still use existing funds to pay for qualified out-of-pocket medical costs, such as assisted living costs.
Tax Benefits: HSAs offer valuable tax advantages:
- Pretax contributions: Money you contribute is deducted before taxes.
- Tax-free withdrawals: Funds used for qualified medical expenses are not taxed.
Withdrawal Rules: Keep these IRS rules in mind when withdrawing money from your HSA.
| Situation | Tax Impact |
|---|---|
| Withdrawals for qualified medical expenses | Tax-free |
| Withdrawals for nonqualified expenses and you’re under 65 | Subject to income taxes and a 20% penalty |
| Withdrawals for nonqualified expenses and you’re 65 or older | Subject to income taxes only |
The Bottom Line
A HSA may be a helpful tool for you. HSAs can be part of a long-term strategy to help you prepare for the costs of medical expenses and help to avoid financial strain if unexpected health issues arise.
Gain flexibility in medical spending through a health savings account. Get My Free Financial Review
Sources
- Rev. Proc. 2025-19 - IRS. https://www.irs.gov/pub/irs-drop/rp-25-19.pdf.
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