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What Is an HSA and How Does It Work? An Honest Guide

What Is an HSA

Health Savings Accounts (HSAs) serve as a vital tool in managing healthcare expenses under the right circumstances. 

With healthcare costs on the rise, understanding how an HSA works can be a game changer in health and financial planning. 

This article delves into the essentials of HSAs, their functions, and how to maximize their benefits.

What is an HSA?

A Health Savings Account is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. 

By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you can lower your overall healthcare costs.

HSAs are linked to high-deductible health plans (HDHPs), which typically have lower monthly insurance premiums but higher deductibles than traditional health plans. 

To qualify for an HSA, you must be enrolled in an HDHP. The criteria include a minimum deductible of $1,400 for an individual or $2,800 for a family, and the maximum out-of-pocket limits are $7,000 for individuals and $14,000 for families as of the current year.


What Is An HSA And How Does It Work?

When you contribute to an HSA, your money enters the account before taxes are deducted from your paycheck, which makes it a powerful tax-advantaged tool. 

You can contribute up to the legal limit each year, which in 2023 is set at $3,650 for individuals and $7,300 for families. If you’re 55 or older, you can add an extra $1,000 as a catch-up contribution.

The tax advantages extend to the earnings; they grow tax-free in the HSA. Additionally, if you withdraw funds for qualified medical expenses, the money is not taxed. 

Qualified expenses include most medical, dental, and vision care costs but exclude over-the-counter medications not prescribed by a doctor.

If you use HSA funds for non-qualified expenses, you face a tax penalty. Before age 65, this penalty is 20% plus the funds will be counted as taxable income. 

At 65 or older, the penalty goes away, and you only pay taxes on withdrawals not used for qualified medical expenses.

Advantages of Using an HSA

HSAs carry several benefits making them attractive for qualified individuals. Notably, they help reduce your out-of-pocket healthcare costs. 

Money saved into an HSA can be used to pay deductibles, copayments, and other medical expenses, significantly reducing the direct financial impact of healthcare needs.

The flexibility is another considerable advantage. With an HSA, you manage how to spend the funds, choosing when to spend your account balance, rolling it over year after year if necessary.

Moreover, HSAs encourage saving for long-term healthcare costs, serving as an additional retirement fund. After age 65, you can use the funds for non-medical expenses without facing a penalty, although such withdrawals are subject to income tax.

Pro Tips for Maximizing Your HSA

To get the most from your HSA, consider these strategies. First, try to maximize your contributions each year. Making the maximum allowable contribution lets you take full advantage of the tax benefits.

Next, consider investing your HSA funds. Many HSA providers offer investment options similar to those found in retirement accounts. Investing HSA funds can potentially increase your account’s growth over time.

Lastly, keep thorough records of your medical expenses. If you’re audited, you’ll need to prove that withdrawals were used for qualified medical expenses.

Comparing HSAs, FSAs, and HRAs

Health Savings Accounts, Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) each offer different benefits for managing healthcare expenses but vary significantly in their rules and flexibility. 

HSAs, linked to high-deductible health plans, allow individuals to contribute pre-tax dollars, with funds rolling over year-to-year and the account remaining with the individual regardless of employment changes. 

FSAs, offered by employers, also use pre-tax contributions for medical expenses, but with a use-it-or-lose-it policy, although some plans permit a rollover of a limited amount to the next year. 

HRAs, employer-funded plans, reimburse employees for qualified medical expenses up to a maximum benefit amount. 

Unlike HSAs and FSAs, HRAs are entirely funded by the employer, and the funds do not roll over if the employee leaves the company. 

Understanding these differences is crucial for optimizing healthcare savings and making informed decisions based on individual healthcare needs and employment status.


Frequently Asked Questions

What are the current year’s HSA contribution limits?

For 2024, the limits are $4,150 for individuals and $8,300 for families. People aged 55 and older can contribute an additional $1,000.

Can HSA funds be used for non-medical expenses?

Yes, but withdrawals for non-medical expenses are subject to income tax and a 20% penalty if made before age 65.

How does an HSA work if I switch jobs or retire?

HSAs are portable. This means you can take them with you when you change jobs or retire. The funds remain available for eligible medical expenses regardless of your employment status.


Health Savings Accounts offer significant financial benefits for those eligible. By understanding and correctly using an HSA, you can make more informed decisions that optimize your healthcare spending and savings. 

With careful planning and responsible management, an HSA can be a pivotal component in your broader financial landscape, helping to manage both current medical costs and future financial wellness.