- HSAs can help you save money on qualified medical expenses.
- To get one, you’ll need to have a high-deductible health plan.
- There’s a limit to how much you can contribute to an HSA each year.
- Certain expenses are excluded from an HSA.
If you qualify for a tax-advantaged Health Savings Account (HSA), it can be a good way to save on a variety of medical costs. But there are rules around how you can use those funds. And breaking those rules comes with some pretty steep consequences.
However, HSAs give you more options than flexible spending accounts, because you don’t have to use up the money in the account during any given year. And you can use the money in an HSA in retirement, too.
Read on for how HSAs work and how you can make the most of them to save.
Inside this article
What are HSAs?
“The HSA is an account that is designed specifically to pay for medical expenses,” says Luke DeBoer, a Certified Financial Planner at The Financial Planning Company.
HSAs let you use pre-tax dollars to pay for certain medical expenses.
“It effectively allows account owners to pay for their medical bills with less money, due to the tax savings,” says DeBoer. “So while a $100 doctor’s bill paid out-of-pocket actually costs somewhere around $120 to $130, due to taxes, that same $100 bill paid out of the HSA literally only costs $100.” (We’ll get into the tax rules more later.)
To qualify for an HSA, however, you have to have an HSA-eligible high deductible health plan (HDHP). For those who can access one, there’s also the option to invest those funds—though your options might be limited if you get an HSA through your employer.
HSA tax deduction and contribution rules
HSAs offer triple tax savings. When you contribute to an HSA, you can deduct that amount from your taxable income. If your employer opts to contribute to your account, that can be deducted, too. And interest or earnings are also tax-free. Any money you take out is tax-free, as long as you use it on HSA-eligible expenses.
There are limits to how much you can contribute to an HSA each year, though:
If you’re under 55, you can contribute up to $3,650 for an individual HDHP.
If you’re under 55, you can contribute $7,300 for a family HDHP.
If you’re 55 or older, you can contribute $1,000 more than the limits above.
Note that the contribution limits include employer contributions.[1, 4] However, HSAs generally let you roll over those funds from one year to the next. So you could build up that account to cover more costly medical expenses, like surgery.
HSAs as part of retirement planning
You can use the money in an HSA account to pay for medical expenses in retirement, too. And when you reach age 65, you have even more flexibility.
“What is very often overlooked is that the HSA can be used for non-medical use without a penalty after the age of 65,” says DeBoer. “So if you still have a balance later in life, the account becomes a form of supercharged retirement account as you can still use it tax- and penalty-free for qualified medical expenses, but also penalty-free for everyday expenses, like groceries.”
Just be aware that if you don’t use that money on qualified medical expenses and you’re younger than 65, it will then be taxed as income.
What expenses are covered by an HSA?
You can use the money in an HSA to pay for deductibles, copayments, coinsurance and other qualified expenses, including some dental, drug and vision expenses, in order to lower your overall health care costs. But that’s not all.
“Though most people know that HSAs can be used for regular medical bills, such as doctor visits, they can also be used for expenses such as braces, chiropractic visits or long-term care expenses,” says DeBoer. HSA funds can be used to pay for many kinds of medical expenses.
Here are some of the expenses that can be covered with HSA funds. For a full list, see IRS Publication 502.
Breast reconstruction surgery
“If you’re using an HSA for qualified medical expenses, you should keep evidence of what the expense was,” says DeBoer. “HSA use is largely an honor system, so no one is going to verify for you that each expense is qualified. But it is possible that you’ll need to provide evidence at some point.”
For example, if you were to be audited, the IRS might ask for proof that your funds were spent correctly.
There are also expenses that are not HSA-eligible. For example:
Cosmetics and skincare
Hair regrowth supplies and/or services
Health club membership dues
Shampoo and conditioner
Always check your HSA plan to see if an expense will be eligible or not.
Is an HSA right for you?
If you have an HDHP, here are some of DeBoer’s rules of thumb for deciding if an HSA makes sense for you:
If you don’t have known upcoming medical expenses, don’t usually max out your deductible and want to protect against unexpected medical expenses, you may want to consider an HSA-eligible health insurance plan.
If you have very strong personal finances and can afford to pay your medical expenses out of pocket, then an HSA can be an extraordinary long-term planning tool.
If your employer will provide a deposit into your HSA, it can be a good idea to get an HSA.
The downside, of course, is that you have to be in an HDHP to get an HSA. So for those who might save more by going with a lower-deductible plan (like folks with chronic health conditions), the tax benefits of an HSA might be enough to outweigh the cons.
“Though not everyone should use an HSA, it is a frankly awesome financial planning vehicle and so everyone should at least consider it,” says DeBoer.