Health savings account (HSA)
A tax-advantaged account paired with a high-deductible health plan, used to pay medical costs now or save for health expenses later.
What it means
An HSA is available only to people covered by a qualifying high-deductible health plan (HDHP) and not enrolled in Medicare. Contributions, up to a limit the IRS sets each year, are deductible or made pre-tax through payroll; money in the account can be invested and grows untaxed; and withdrawals for qualified medical expenses are tax-free. A few states do not follow the federal tax treatment.
Unused money rolls over every year and stays with the person if they change jobs or plans. Before age 65, withdrawals for non-medical purposes are taxed and face a 20% additional tax; after 65, they are simply taxed as ordinary income, so the account can act like an extra retirement account.
Example
Suppose someone in a hypothetical 22% bracket contributes $3,000 through payroll. That lowers their federal income tax by $660, and if they later spend the $3,000 on a qualified medical bill, the withdrawal is tax-free.
How it’s used
- Paying deductibles and other medical costs with pre-tax money
- Investing for health costs in retirement
- Lowering taxable income
Strengths and weaknesses
Strengths
- Tax benefits on contributions, growth and qualified withdrawals
- Balance rolls over and is portable between jobs
- Can be invested for long-term growth
- Flexible use after 65
Weaknesses
- Requires a high-deductible plan, which means higher costs before coverage starts
- Non-medical withdrawals before 65 face tax plus a 20% additional tax
- Some providers charge fees or require a minimum cash balance before investing
Good to know
- Saving receipts for qualified expenses can allow tax-free reimbursement years later, as long as the expense occurred after the HSA was opened.
See it in the data: Medical care prices relative to inflation →
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Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.