Health Savings Account (HSA)

What is a health savings account (HSA)?

A health savings account (HSA) is a tax-advantaged account you can use to pay for qualified medical expenses, and you can only contribute to one if you are covered by a high-deductible health plan. The money is yours, it rolls over every year, and it stays with you if you change jobs or insurance. Many HSAs also let you invest the balance.

Key takeaways

• HSAs have three tax advantages: contributions are tax-deductible or pre-tax, growth is untaxed, and withdrawals for qualified medical expenses are tax-free.
• You must have an HSA-eligible high-deductible health plan to contribute.
• Unused money does not expire at the end of the year.
• Contribution limits and plan deductible rules change yearly. Check IRS Publication 969 for current figures.

How an HSA works

To contribute, you need to be enrolled in a high-deductible health plan (HDHP) that meets IRS requirements, and you generally cannot have other disqualifying health coverage. You can open an HSA through your employer or on your own at an HSA provider. The annual contribution limit depends on whether you have self-only or family coverage, and it changes most years, so check IRS Publication 969 for the current numbers.

Contributions made through payroll come out before income tax. If you contribute on your own, you can deduct them on your tax return. Some employers add money to your HSA too.

Once the money is in, you can spend it on qualified medical expenses at any time, tax-free. Or you can leave it in the account and invest it, often in mutual funds or index funds, so it can grow over years.

If you withdraw money for something that is not a qualified medical expense before age 65, you owe income tax plus a 20% penalty. After 65, non-medical withdrawals are taxed as income with no penalty, which works a lot like a traditional IRA.

Hypothetical example: You contribute $3,000 to your HSA through payroll. That $3,000 is not taxed as income. You leave it invested, and over many years it grows to $12,000. If you use that $12,000 for qualified medical bills, you never pay tax on any of it. See how long-term growth works with the compound interest calculator.

Why it matters for your Money Type

At Priceless Tay, the Strategist Money Type is the person whose basics are handled but whose plan has not scaled with their income. They already have a 401(k) and maybe a Roth IRA, and they are looking for the next upgrade.

For a Strategist with an eligible health plan, the HSA is often that upgrade. One common approach is to pay current medical bills from regular cash flow, invest the HSA balance, and keep receipts, since the IRS does not set a deadline for reimbursing yourself for qualified expenses incurred after the HSA was opened. That turns the account into long-term savings rather than a spending account.

A Scrambler may need to use the HSA for this year's medical costs, and that is still a good use, because those bills are paid with untaxed money. A Saver should know that HSA money can be invested instead of left in cash. Not sure of your type? Take the Money Types quiz.

Common questions

What is the difference between an HSA and an FSA?

An HSA belongs to you, rolls over every year, can be invested, and requires a high-deductible plan. A flexible spending account (FSA) is offered through an employer, usually has use-it-or-lose-it rules with limited carryover, and does not require a high-deductible plan.

What happens to my HSA if I change jobs?

You keep it. The account is in your name, so the money goes with you even if you leave the employer or switch health plans. You can only keep contributing while you have HSA-eligible coverage.

Can I use my HSA for non-medical expenses?

You can, but before age 65 you will owe income tax and a 20% penalty on that withdrawal. After 65 the penalty goes away, and non-medical withdrawals are taxed as regular income.

Can I invest the money in my HSA?

Many HSA providers let you invest once your balance passes a set amount. Check your provider's options and fees, and talk with a tax professional if you are unsure how HSA rules apply to your coverage.