With soaring insurance premiums, many families opt for a higher deductible, which can mean significant out-of-pocket costs. Enter health savings accounts (HSAs), which offer a way to put aside cash in case the worst happens. HSAs offer significant tax benefits and peace of mind if you’ve got a high-deductible health plan (HDHP).
Beyond that, these specialized accounts are so versatile that some financial advisers suggest using health savings accounts as part of retirement planning along with a 401(k) or individual retirement account (IRA). Read on for the key benefits of a health savings account and how it can help protect your family.
What Are the Benefits of a Health Savings Account?
The benefits of an HSA are significant for individuals and families considering financial freedom and a medical safety net. Here are 15 main highlights:
Tax Advantages
Health savings accounts offer triple tax benefits: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. This is significant as it’s a way to reduce taxable income and save more money. If you’re older than 65, you can withdraw funds for any reason penalty-free. You’ll have to pay taxes on those withdrawals.
As of 2023, the maximum contribution to an HSA for individuals is $3,850; for families, it’s $7,700. Those older than 55 can make additional catch-up contributions of $1,000 per year.
Lower Healthcare Costs
By contributing to an HSA, you can set aside money for medical expenses, which helps lower out-of-pocket healthcare costs. HSAs can cover deductibles, copayments, coinsurance, prescriptions, medication and other qualified medical expenses.
Having a high-deductible health plan means you’ll also pay less each month on insurance, potentially offering greater savings opportunities.
Highly Flexible
Health savings accounts provide flexibility in using funds for a wide range of qualified medical expenses, such as doctor visits, prescription medications, dental care, vision care and more. You can pay for many medical expenses not covered by standard health insurance.
If you’re looking for the flexibility to choose medical services and treatments without relying solely on insurance coverage, an HSA offers better options and personal control.
Portable Savings
HSAs are portable, allowing you to keep your funds even if you change jobs or health insurance plans. Each year, the unused funds in the health savings plan will roll over to the next year like other types of retirement or savings accounts. The fact that HSA funds can be carried over from year to year ensures that they are not lost and instead can be a vehicle for tax-free growth.
Control Over Healthcare Decisions
When you’re faced with a serious medical diagnosis, you want the best care available. But not all healthcare providers are covered by every insurance network. A health savings account gives you greater control over your healthcare decisions. Instead of relying solely on the insurance provider, the decision is yours.
While “medical expenses” are defined by the IRS, most HSAs have provisions for natural or alternative medicine like chiropractic or mental health support, offering you a broader range of healthcare solutions. You can choose the medical services and treatments that best meet your needs and do more to ensure your family gets the best care available.
Investment Options
HSA account benefits extend to the possibility of growing the account faster. Many health savings account providers offer investment options, allowing you to grow your HSA funds over time. When investing HSA funds, you could potentially earn additional returns on contributions.
Because an HSA is primarily a savings account to protect you in case the worst happens, most financial advisers suggest a conservative investment approach or holding the funds in investments like bonds that are low risk.
No Use-it-or Lose-it Rule
Health savings accounts do not have a use-it-or-lose-it rule. Any funds in the HSA remain there indefinitely, regardless of whether you used them in a specific year. Like other savings vehicles, contributions remain yours, and you can pass any remaining funds onto heirs after your death.
If you choose to deduct funds for nonmedical expenses before age 65, you couldl be hit with a 20% penalty plus applicable income taxes. If you leave the funds in the HSA and withdraw them after age 65, you’ll only pay income taxes. Any funds contributed to an HSA remain in the account indefinitely, even if they are not used within a specific year.
Higher Contribution Limits
Health savings accounts for people with high-deductible healthcare plans offer higher contribution limits than other types of healthcare savings accounts. Limits are set annually.
As of 2023, families can contribute up to $7,700, and individuals can contribute a maximum of $3,850. Anyone 55 or older can contribute an additional $1,000 per year.
Lower Insurance Premiums
High-deductible health insurance plans paired with HSAs often have lower monthly premiums than traditional health insurance plans. Insurance premiums aren’t a savings vehicle; you won’t get them back once you've paid them, although you should get insurance coverage for medical needs. If you opt for a high-deductible healthcare plan, you may pay lower insurance premiums, along with contributing to an HSA, which can offer cost-saving advantages that help you save more over time.
Emergency Savings
A primary role of health savings accounts is to serve as an emergency fund for healthcare expenses. Having funds in the HSA can help you cover unexpected medical costs without causing significant financial strain. As unexpected medical expenses and long-term healthcare are two of the largest strains on individual finances, an HSA offers peace of mind and security.
Pre-Tax Payroll Contributions
Many employers offer the option to contribute to an HSA directly from the paycheck on a pre-tax basis. This reduces taxable income by deducting contributions before taxes. For someone contributing the maximum, that is $3,850 less in taxable income.
Family Savings
A family HSA can offer affordable coverage and security if you have a spouse or children. A family HSA allows the use of funds to cover qualified medical expenses for the spouse and dependents.
The comprehensive healthcare savings solution provided by a family HSA means your whole family has the freedom to choose the medical providers or services that can best address the situation.
Health and Retirement Savings Combination
Health savings accounts can serve as a unique way to save for both healthcare expenses and retirement. Once you turn 65, you can use the funds in your HSA for nonmedical expenses without penalties, although regular income tax will apply.
Financial Security
Having a health savings account allows you to build a financial safety net specifically for healthcare needs. Unexpected medical expenses are one of the primary causes of bankruptcies for families. Setting aside funds for medical expenses can provide peace of mind and help alleviate financial stress during times of medical need.
Educational Opportunities
Health savings accounts provide valuable opportunities to learn about personal finance, healthcare costs and the importance of saving for future medical needs.
As coverage and criteria vary by plan, becoming more educated and proactive about allowing healthcare expenses through your HSA is important. To start, check out the best HSA providers.
Summary of HSA Benefits
Healthcare needs are unpredictable. No one knows when they’ll need coverage or whether they’ll ever have significant medical expenses. The benefits of HSA accounts allow you to account for this unpredictability while giving you freedom and flexibility.
While the main HSA benefits center around tax savings and reduced insurance premiums, their flexibility and choice can be even more powerful in case of a rare or unusual medical diagnosis. As part of a retirement, investment and savings plan, an HSA can offer families an added layer of financial security to grow over time.
Frequently Asked Questions
What are the tax benefits of having a health savings account?
Health savings accounts offer three primary tax benefits. First, you may contribute pre-tax income to reduce your taxable income on the year of contribution. Second, contributions can grow tax-free. Third, you may withdraw the funds tax-free for use on medical expenses.
How can I use the funds in my health savings account?
You can use the funds in your health savings account for qualified medical expenses. After age 65, you may withdraw funds for nonmedical expenses and pay applicable income tax rates.
What are the main benefits of having a health savings account?
Health savings accounts offer significant tax advantages to grow funds tax-free for medical expenses or retirement. They give you control and flexibility to choose medical providers while building savings to cover high-deductible healthcare plans.
About Alison Plaut
Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.