966. Laura reviews the benefits of a health savings account (HSA), who qualifies for one, and ways they can save you the most.
966. Laura reviews the benefits of a health savings account (HSA), who qualifies for one, and ways they can save you the most.
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Welcome back to episode 966 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. Subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Or leave a voice message with your question or comment by calling 302-364-0308. I'd love to feature your question on Finance Friday, our weekly Q&A, bonus edition of the show!
One of my favorite tax-advantaged accounts is a health savings account, or HSA, for short. Since October 15 is National HSA Awareness Day, this post will review the powerful benefits of HSAs and how they were designed to help Americans prepare for unexpected healthcare costs and retirement.
How does a health savings account (HSA) work?
An HSA is a type of medical savings account designed specifically to pay for eligible healthcare expenses. However, to qualify for an HSA, you must have a particular type of high-deductible health plan that’s HSA-qualified. You can purchase the coverage on your own or get it through an employer.
A health plan deductible is the amount you must pay out-of-pocket for covered medical expenses before your policy benefits begin each year. Deductibles and premiums have an inverse relationship, meaning that increasing one causes the other to decrease. Therefore, having a higher deductible means you pay more out-of-pocket, but have lower monthly insurance premiums.
More employers are offering HSA-eligible health plans to help workers keep premiums as low as possible. However, high deductible health insurance isn’t the right choice for every individual or family. In general, they can pay off when you, your spouse, or your covered dependents are in relatively good health and not likely to spend a full annual deductible.
However, if you visit the doctor frequently, expect a hospitalization, or have a chronic illness, consider choosing a lower deductible health plan to save money. While your health premiums will be higher, you’ll have a lower annual out-of-pocket deductible.
Once you’re enrolled in an HSA-qualified health plan, you can open an HSA at various online or local financial institutions. You don't need permission from an employer or the IRS to set up an HSA, and it stays with you if you change jobs, switch health plans, or become unemployed.
Another excellent HSA benefit is that there’s no spending deadline. Your funds remain in the account indefinitely, with no penalty for not using them. In addition, you can spend an HSA on yourself, a spouse, or dependents for a wide variety of qualified, out-of-pocket healthcare expenses, no matter if they’re covered by insurance or not.
An often-overlooked way to fund an HSA for the first time is by using money you've already saved in a traditional IRA by doing a tax-free rollover. That’s how I funded my first HSA and think it’s an excellent option. You can do an HSA rollover once in your lifetime, up to the annual HSA contribution limit, which I’ll review in a moment.
What are the benefits of a health savings account (HSA)?
HSAs give you the following three tax breaks:
Some company benefits include regular deposits into an HSA, similar to matching funds for a retirement plan. HSA contributions from an employer don't get included in your taxable income, which is another terrific benefit!
HSA funds can earn interest, or you can invest some or all of them for potential growth in a menu of options, such as mutual and exchange-traded funds. When you take distributions to pay qualified healthcare expenses, your original contributions plus interest and investment earnings are entirely tax-free.
Depending on your average income tax rate, using an HSA to pay allowable healthcare expenses on a tax-free basis could equate to a 20% to 30% discount. That’s a significant savings!
However, similar to a retirement account, you should never put money in an HSA that you might need for everyday expenses. Until age 65, you can only use HSA funds to pay qualified, unreimbursed healthcare expenses. Withdrawing money for non-qualified expenses, such as groceries, clothes, or a vacation, means you must pay income tax plus a hefty 20% penalty.
RELATED: Your guide to saving money with an HSA now and in retirement
How much can you contribute to an HSA?
For 2025, you can contribute up to $4,300 to an HSA when you have an individual health plan or up to $8,550 with a family plan.
For 2026, the HSA contribution limit for individual insurance increases slightly to $4,400, and the family plan cap goes up to $8,750. If you're over 55, you can contribute an additional $1,000 with either type of insurance.
You can make tax-deductible contributions anytime during the year, even up to April 15 for the previous tax year. But you're never required to make contributions to an HSA.
RELATED: Rules for using a health savings account (HSA) as a couple
How can you use an HSA in retirement?
I mentioned that an HSA is also a retirement planning tool. That’s because after age 65, you can spend it on non-qualified expenses without paying a 20% penalty. Be advised, though, that you'll still need to pay income tax on those amounts.
Therefore, having an HSA after 65 makes it similar to a traditional retirement account. That's a great reason to max out annual HSA contributions, even if you don't expect many healthcare expenses.
LISTEN ALSO: Tips to maximize an HSA from tax savings to retirement
What are HSA-qualified medical expenses?
Once you've opened an HSA and have a balance, understanding how to spend it is critical. Qualified expenses include a wide range of healthcare costs you incur until you meet your annual deductible or that aren't covered by your health plan.
According to the IRS, an HSA-qualified expense must be used to pay for healthcare services, equipment, or medications. Some examples include:
There are hundreds of potential HSA-qualified healthcare expenses, and you can see the complete list in IRS Publication 502, Medical and Dental Expenses.
Strategies for using an HSA
Because HSAs offer so many benefits, a common question is whether it’s better to spend them as you incur healthcare costs or keep the balance invested for long-term growth. Here are three strategies for using your HSA:
1. Make tax-free withdrawals to pay current healthcare expenses.
Most HSAs give you a debit card to pay for eligible expenses in real-time. That's the traditional and most popular way to use an HSA, especially if you don't have other savings to pay healthcare costs.
2. Pay healthcare costs out-of-pocket and reimburse yourself later.
HSA rules don't require you to pay qualified expenses within a specific period. If you can pay for healthcare out-of-pocket, you can make HSA withdrawals in the future to reimburse yourself. This strategy is called "shoeboxing" your HSA because you keep healthcare receipts as an IOU to yourself that you can redeem anytime in the future.
3. Pay healthcare expenses out-of-pocket with no future reimbursement.
HSA rules don't require you to reimburse yourself for qualified healthcare expenses. You can opt not to make any account withdrawals and keep the money growing tax-free in the account. Or you could pay small healthcare expenses out of pocket and reserve your HSA for high or unexpected qualified costs.
Whether you should spend your HSA or keep it invested depends on your account and financial situation. On one hand, if you don’t invest the funds or they earn little interest, you'll likely come out ahead by spending them and getting guaranteed tax savings. But on the other hand, if you invest your But on the other hand, if your HSA is invested with a good average return and it grows for decades, it could be worth more in the long run.
READ ALSO: 4 common HSA mistakes and how to correct them
How do you open and fund an HSA?
If you qualify for an HSA, they're available at many institutions, but a couple of my favorites are Lively and HSA Bank. They're convenient to use, offering paper checks, debit cards, and online banking. Shop around to find an HSA with diversified investment options, low fees, and a convenient online experience.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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