What is a health savings account (HSA)?
Key takeawaysHSAs offer triple tax advantages to help reduce healthcare costs. You can use HSA funds tax-free for qualified medical expenses. HSA balances roll over yearly and can grow through investing. The use. . .
Key takeawaysHSAs offer triple tax advantages to help reduce healthcare costs. You can use HSA funds tax-free for qualified medical expenses. HSA balances roll over yearly and can grow through investing. The use of Health Savings Accounts (HSAs) has grown dramatically, with more than$137 billionheld in about 38 million accounts, as of mid-2024. 1This surge reflects the growing importance of saving for healthcare expenses. Yet Empower research shows that justhalf of people (50%) say they understand what an HSA is, with more Gen Xers (57%) and fewer Gen Zers (40%) familiar with the option. An HSA account offers a way to set aside money for medical costs, which can make it easier to manage healthcare now and in the future. An HSA account can serve as both a savings and investment tool, providing tax advantages and flexibility. It allows consumers to pay for qualified medical expenses while setting aside funds for future healthcare needs. What is a health savings account (HSA)?A health savings account (HSA) is a special savings account designed to cover medical expenses. It allows individuals with high-deductible health plans (HDHPs) to contribute pre-tax dollars toward healthcare. You can use the money in an HSA for various qualified healthcare expenses. Any unused funds remain in the account from year to year, potentially growing through contributions and if you decide to invest the assets once you reach a certain account balance. HSA benefits extend beyond covering current medical needs. It offers the flexibility to potentially grow funds tax-free, providing financial relief for future healthcare costs. Using an HSA for medical expenses during retirement can offer one pathway on the journey to financial security. Benefits of an HSA accountHSAs can provide valuable benefits, making them a powerful tool for managing healthcare expenses. With tax efficiency and long-term growth opportunities, they can serve as one component in any well-rounded financial strategy. Using an HSA for medical expensesOne of the greatest benefits of an HSA account is the ability to use the funds for a wide range of qualified medical expenses. This flexibility allows individuals to cover essential healthcare costs without dipping into their regular income. Eligible HSA expensescan include:Doctor visits and medical proceduresPrescription medicationsDental and vision careHealth-related equipment such as eyeglasses, hearing aids, and insulin pumpsBy using HSA funds for these expenses, individuals enjoy the benefit of tax-free withdrawals, which can make healthcare spending more affordable. Triple tax advantageThe triple tax advantage* of an HSA account makes it one of the most tax-efficient savings tools available:Tax-free contributions:Contributions made to your HSA can reduce your taxable income, offering immediate tax savingsTax-free investment growth:Any potential interest, dividends, or investment gains within the HSA account grow tax-freeTax-free withdrawals:When used for qualified medical expenses, withdrawals from the HSA are not subject to income tax*Contributions, any earnings, and withdrawals are federal income tax-free if used to pay for qualified medical expenses. State income taxes may still apply. HSA funds used for non-qualified medical expenses may be subject to applicable federal and state income taxes and/or penalties. These combined tax benefits can make HSAs an attractive choice for individuals looking to reduce their healthcare expenses while working to grow their savings. Long-term growth potentialFunds in an HSA account can grow over time and be invested in stocks, bonds, and mutual funds, allowing account holders to work toward building wealth while saving for medical expenses. The ability to invest HSA funds is a unique feature that distinguishes it from other healthcare savings tools. Investing early and consistently can increase the value of the HSA, enabling you to set aside money to cover healthcare costs in the future. No "Use-it-or-lose-it" ruleUnlike flexible spending accounts (FSAs), HSA funds do not expire at the end of the year. Unused balances roll over indefinitely, giving account holders flexibility to decide when and how to use their savings, plan for future healthcare needs and build a financial cushion for emergencies. 2This enables individuals to plan for long-term health care expenses. Portability for life changesAn HSA account offers portability, meaning the account remains with you even if you change jobs, switch health plans, or retire. This is a crucial feature, as other employer-sponsored benefits, such as FSAs or retirement health savings plans, may not offer the same flexibility. Since the account belongs to the individual, HSA savings and investments are accessible even if you change employers. Retirement healthcare savingsHSAs offer a dual-purpose benefit by serving both as a healthcare savings tool and a retirement planning vehicle. After age 65, HSA funds can be used for non-medical expenses without penalties, though withdrawals will be taxed as ordinary income. 2This feature allows individuals to treat the HSA as an additional retirement fund. It can be used to save for medical costs while working, and once they retire, the funds can either continue to cover healthcare expenses or supplement other retirement income sources. HSA contribution limits and guidelinesUnderstandingHSA contribution limitsis crucial for maximizing the benefits of your account. 3Each year, the IRS sets a cap on how much you can contribute to an HSA. For 2026,the limits are as follows:Individual coverage: $4,400Family coverage: $8,750Catch-up contributions(age 55+): An additional $1,000To help optimize contributions, consider:Spreading contributions evenly throughout the year to avoid last-minute depositsMonitoring any annual updates to HSA contribution limits to adjust contributions accordinglyAvoiding exceeding limits to prevent penaltiesChanges to HSAs Under the One, Big, Beautiful Bill (OBBB)TheOne, Big, Beautiful Bill (OBBB) Act, passed in July 2024,expandedwho can qualify and use an HSA beginning in 2025 and 2026:4Expanded HSA eligibilityTelehealth services can be usedbeforemeeting the deductible without losing HSA eligibility (effective for plan years starting 2025). Bronze and catastrophic health plans will be treated as HSA-compatible HDHPs beginning 2026, allowing more people to contribute. Direct Primary Care (DPC) arrangements may qualify for HSA contributions, and HSA funds can be used tax-free to pay eligible DPC fees (starting 2026). Guidance for HSA successAn HSA account offers numerous benefits, including tax-free savings, investment growth, and flexibility in covering healthcare expenses. Whether you're looking to save for immediate medical costs or invest for future healthcare needs, an HSA can be a powerful tool in your financial arsenal.