HSAs have more perks than you may realize.
Health savings accounts, or HSAs, are a special type of savings account that holds money put aside for medical expenses. Not everyone is eligible to open one, however; you must be enrolled in a high-deductible health insurance plan. This means that in 2022, if you have only individual coverage, your annual deductible must be at least $1,400 (with an annual out-of-pocket expense capped at $7,050). If you have family coverage, though, the numbers double. Your annual deductible needs to be at least $2,800 and out-of-pocket expenses capped at $14,100.
You're also not allowed to have any other health insurance coverage (with a few exceptions, including dental and vision insurance). And you're not allowed to have a flexible spending account either. FSAs and HSAs are sometimes confused; a healthcare FSA allows you to put aside a certain amount of money (up to a limit) to cover medical expenses for a given year. Often, you can't carry that money forward and must spend all that you've put in before the end of the year.
Here's the neat thing about HSAs: They're funded with pre-tax money. The annual maximum contributions allowed by the IRS (individual health plan: $3,650; family plan: $7,300; you can add $1,000 more if you are over age 55) will be taken right off the top of your gross salary earnings. The tax advantages don't stop there: HSA withdrawals are tax-free (if you use the money for qualifying medical expenses), and if you choose to invest your HSA funds (see below), your investment gains will also be tax-free.
So, you've checked with your health plan's administrator, and you're eligible to open an HSA. Hooray! Here's why you should contribute as much as you can.
1. HSAs are flexible
HSAs offer excellent flexibility, which is something you can't necessarily say about a lot of financial products. You get to decide how much money you want to put in (up to the limits we discussed above). If you start off the year by putting in $300 a month, and then you decide you need to cut back on those contributions for whatever reason, you can. Or if you think you can only afford to add $150 a month, then you get a raise at work, you can boost that contribution. You can carry money forward in an HSA, year after year. And you might even be able to invest it!
2. HSAs can become an additional retirement account
That's right -- you may also be allowed to invest the money in your HSA. This will depend on where you open your HSA; if it's held by a bank, you might be limited to just earning interest on the contributions in the account. But if you start an HSA through a brokerage, you will likely be allowed to invest in stocks, bonds, and ETFs if you have a certain minimum balance. And you won't have to pay taxes on your investment profits. Since your contributions are pre-tax, and your medical expense withdrawals are tax-free, HSAs offer a triple tax benefit. In short, an HSA can become another retirement account, if you've already maxed out your standard retirements, like a 401(k) or an IRA. Wow!
As you can see, it's worth it to max out your HSA contributions. How often do you get to take advantage of such a flexible and beneficial financial vehicle?
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
FAQs
Maxing out your HSA each year easily allows your funds to grow over time. Unlike regular savings accounts, an HSA allows you to invest funds in stocks, bonds, and mutual funds.
Why should I max out my HSA? ›
Max out your contributions if you can
The more you can contribute, the more you can benefit from the HSA's potential triple tax advantages1. Keep in mind: you don't lose any unspent funds at the end of the year. Your HSA can be used now, next year or even when you're retired.
Why would I have an excess HSA contribution? ›
It's possible an excess contribution can occur if you're not tracking all of the contribution sources to your account. Or you may have an excess contribution because you added funds to your HSA when you were no longer eligible to make contributions.
Why HSA is better than 401k? ›
Comparing HSAs and 401(k)s
The triple-tax-free aspect of an HSA makes it better for tax management than a 401(k). However, since HSA withdrawals can only be used for healthcare costs, the 401(k) is a more flexible retirement savings tool. The fact that an HSA has no RMD gives it more flexibility than a 401(k).
What is the penalty for putting too much in HSA? ›
Are excess contributions subject to a penalty? Yes. In general, an excise tax of 6% for each tax year is imposed on the HSA owner for any excess individual and employer contributions made to their account that are not removed within the same tax year.
Is it recommended to max out HSA? ›
Contribute as much as you can afford to an HSA. The tax advantages of a health savings account (HSA) are unique, even better than any IRA or 401(k) plan. As a result, an HSA is like a “super IRA,” and you should contribute as much as you can afford, subject to IRS limits on HSA contributions.
Should I max out my Roth or HSA? ›
Should I max out my HSA or IRA first? HSAs and Roth IRAs are both tax-advantaged accounts. The IRS sets a limit on how much you can contribute to both each year. As we said above, HSA may be a better option to max out first since it offers potentially more savings power.
Why is Turbotax saying I overfunded my HSA? ›
Make sure you didn't accidentally re-enter the amount already listed (from box 12 of your W-2) as this will incorrectly double your total contribution amount. Continue through the HSA screens, making sure you answered all questions correctly.
Can I use HSA for gym membership? ›
Gym memberships. While some companies and private insurers may offer discounts on gym memberships, you generally can't use your FSA or HSA account to pay for gym or health club memberships. An exception to that rule would be if your doctor deems fitness medically necessary for your recovery or treatment.
What is a potential downside of HSA? ›
Meeting the Mark: One major hurdle with an HSA is the high-deductible health insurance plan (HDHP) requirement. Before your insurance kicks in, you need to pay a significant amount out-of-pocket. This can be a challenge, especially if unexpected medical costs arise early in the year.
Cons of an HSA
- Only available with high-deductible health plans.
- You'll owe taxes and penalties on distributions before age 65 that aren't for qualified medical expenses.
- You must keep records to show the IRS that you used your withdrawals for qualified expenses.
Does HSA spending trigger an audit? The IRS doesn't monitor how you spend your HSA funds throughout the year, but that doesn't mean they won't ask for proof that your expenses were eligible. And if your tax return contains unrelated IRS audit red flags, your risk for an HSA audit could increase.
How does IRS know what you spend HSA on? ›
Verification of expenses is not required for HSAs. However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA. You are responsible for reporting qualified and non-qualified withdrawals when completing your taxes.
Can I cash out my HSA? ›
Yes. You can take money out any time tax-free and without penalty as long as it is used to pay for qualified medical expenses.
What happens if I don't have enough money in my HSA? ›
If you do not have enough money in your HSA to pay for an eligible medical expense you will need to pay for the expense by some other means. Once the money is in your HSA account, you can withdraw the amount that you paid and reimburse yourself.
Do HSA contributions reduce your taxable income? ›
A health savings account is a tax-advantaged way to save money. HSA contributions reduce taxable income, investment growth in the account is tax-free, and qualified withdrawals are tax-free. Money left over at the end of the year in an HSA is not forfeited and can be rolled over from year to year.
