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Why a Health Savings Account (HSA) Is a Good Deal

A health savings account (HSA) is a type of bank account that helps you lower your taxable income while saving money on a range of health care expenses.

Using an HSA can save an average of $955 per year in taxes for individuals or $1,909 per year for families. The downside is that your insurance plan will likely pay for less of your medical expenses because you'll need a high-deductible health plan to contribute to an HSA.

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How does an HSA work?

Health savings accounts (HSAs) allow you to put pretax money into a savings account and use that money for medical expenses, without ever paying income taxes on it.

An HSA will usually give you a debit card to use for qualified medical expenses such as prescription drugs and prescribed medical tests.

You can only contribute to an HSA if you have a high-deductible health plan (HDHP). Funds in an HSA can earn interest and be invested so your HSA can grow if you don't spend the money. Employers can also contribute to HSAs on your behalf.

For example, let's say you're expecting medical bills totaling $3,000 in the coming year for prescriptions, medical tests or an expected expense like eye surgery or childbirth. You can pay these expenses using untaxed money you have in an HSA, as long as you had the account before you had to pay the expenses.

Money in an HSA can roll over from year to year. This can provide a rainy day fund for medical expenses, or it could be used as a retirement savings tool to pay for Medicare or other out-of-pocket costs.

Health savings account limits 2024

The 2024 HSA contribution limit is $4,150 for individuals and $8,300 for families.

This limit is the most you or your employer can put in the HSA account each year. If you are age 55 or older, you can make an additional $1,000 annual contribution.

Is an HSA worth it?

An HSA is worth it if you expect to have any health expenses, ever, an HSA allows you to pay them with pretax dollars.

Since almost everyone eventually faces health expenses, using an HSA to pay for them with pretax dollars can help your money go further.

The downside is that you are making some trade-offs with your medical coverage when you get a high-deductible health insurance plan that's eligible for an HSA.

When a plan has a high deductible, you could initially have expensive upfront costs if you need medical treatment other than preventive care. For example, you may need to pay the first $1,600 in health care bills before the plan's cost-sharing benefits begin. However, you can use your HSA funds to pay for this, offsetting the potential expense.

HSAs offer several tax benefits:

  • You can deduct your HSA contributions from your taxes.
  • If your employer contributes money to your HSA, the contribution is not included in your total taxable income.
  • The interest you earn from an HSA is tax-free.
  • When you use your money for qualified medical expenses, the distributions are tax-free.

What can you spend HSA funds on?

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You can use money in an HSA to pay for doctor visits and dentist bills, prescription copays, eye exams, contacts and prescription glasses, and medical supplies from bandages to hearing aids.

The list of eligible expenses is long. It even includes expenses that may not be covered by health insurance at all, like laser eye surgery, guide dogs or fertility treatments.

While you usually cannot use HSA funds to pay monthly premiums for health insurance, there are important exceptions. You can use HSA money to pay your plan's monthly rate for:

How much can you save with an HSA?

The amount of money you could save on taxes is based on your income tax rate.

For an individual who puts the annual maximum of $4,150 into their HSA, the tax savings would typically be between $830 and $1,450 annually. A family could save almost $3,000 per year on income taxes if they contribute the maximum amount of $8,300 and have a tax rate of 35%.

Individual

Family

Tax rate
Maximum tax savings
20%$830
25%$1,038
30%$1,245
35%$1,453

Individual

Tax rate
Maximum tax savings
20%$830
25%$1,038
30%$1,245
35%$1,453

Family

Tax rate
Maximum tax savings
20%$1,660
25%$2,075
30%$2,490
35%$2,905

HSA funds can roll over or be used as retirement savings

The money in a HSA is yours. You take your HSA money with you if you leave a job, and unused HSA money rolls over from year to year. That means if you have $500 in your HSA in December, you do not have to use it or lose it. Any unused funds do not count toward the maximum contribution in the new year, so you can build a nest egg to help pay for health care needs.

Because HSA funds stay in your account from year to year, you won't risk losing your money.

This makes HSAs more flexible than FSAs (flexible spending accounts) which are also used for medical expenses but have more restrictions.

Once you enroll in Medicare, you can no longer contribute to an HSA, but you can keep any leftover money. These funds can pay for medical costs as well as the cost of Medicare including Original Medicare (Part B), Medicare Advantage (Part C) or a Medicare prescription plan (Part D), which can total almost $3,000 per year. Your spouse inherits your HSA if you designate them as the beneficiary.

Even though an HSA can be used as a way to save for retirement, the majority of account holders are spending at nearly the same rate they're contributing

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HSA contributions average $1,684 per year, and HSA withdrawals average $1,220 per year.

Which health insurance plans are HSA-eligible?

You can only make contributions to an HSA if you are enrolled in what the IRS classifies as a high-deductible health plan (HDHP). For example, an HDHP for an individual must have a deductible of $1,600 or higher and an out-of-pocket maximum that's less than $8,050.

An HSA-eligible health insurance plan must:

  • Have a plan deductible that's higher than the IRS requirement
  • Have an out-of-pocket maximum that's lower than the IRS requirement
  • Provide no insurance coverage until the plan's deductible has been met, except for preventive care services like check-ups and screenings.

Based on current IRS rules, an HSA-eligible individual insurance plan must have a deductible that's $1,600 or higher. Also, the plan's out-of-pocket maximum must be $8,050 or less for an individual — that's lower than the spending cap for some plans sold on HealthCare.gov, which can be up to $9,450.

High-deductible health plan (HDHP) limits

Self only
Family
Minimum deductible$1,600$3,200
Maximum out-of-pocket$8,050$16,100

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Only 5% of health insurance plans sold on the federal exchange, HealthCare.gov, are eligible for HSAs.

On the Plan Finder, HSA-eligible plans are indicated in the upper left corner of the plan description, or you can filter your local options to only see HSA-eligible plans.

Find out if your plan is HSA-eligible

If you aren’t sure if your health insurance qualifies you for an HSA, call the company and ask. If you purchase a plan through a federal or state exchange, the answer should be in the plan information available through the exchange website.

If you qualify for an HSA, you can walk into any bank that offers these accounts (most do) or consider an online bank.

When choosing an HSA, look into any fees you will be charged as well as interest rates and investment options for the money you leave in an HSA.

It’s important to establish your HSA as soon as possible if you expect medical expenses — even if you don’t have the money to fund it right away. That’s because you can only use money in your HSA to pay for expenses that occur after the account was established. Make sure you fund the account while you still have an eligible plan. If you later switch to a plan that can't have an HSA, you cannot add contributions for that year. However, you can use the funds that are already in the account for qualified expenses.

If you don't currently have a health insurance plan that's eligible for an HSA, you'll have to wait until your next enrollment period to change your coverage. This is usually each fall during open enrollment but you may be able to change your plan mid-year if you have a special circumstance like moving or a change in your family size.

Sources and methodology

Estimated annual tax savings of $955 per individual and $1,909 per family are based on contributions up to the 2024 health savings account limits and the average tax rate of 23%.

Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.