What Is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a special savings account that allows you to set aside money for qualified medical expenses while receiving valuable tax benefits.

Not everyone is eligible to open an HSA. To qualify, you must be enrolled in a High Deductible Health Plan (HDHP) that meets IRS requirements. Some employers offer HSAs as part of their health benefits, but you can also open one on your own if you're eligible. The account belongs to you, even if you change jobs or retire.

The IRS limits how much you can contribute each year, and those limits are adjusted periodically for inflation. If you're age 55 or older, you're also allowed to make an additional catch-up contribution.

Money in an HSA can be used tax-free for many qualified medical expenses, including doctor visits, prescriptions, deductibles, copayments, dental care, vision care, and many other healthcare costs.

One unique feature of an HSA is that there is no deadline to use the money. Funds remain in your account from year to year, and any unused balance continues to belong to you. Many people pay current medical expenses out of pocket and allow their HSA to grow for future healthcare costs.

Some HSA providers also allow you to invest money once your balance reaches a certain amount. This gives the account the potential to grow over time, making it a useful part of a long-term retirement plan for some people.

If you withdraw money for a non-qualified expense before age 65, you'll generally owe income tax plus a penalty. After age 65, withdrawals for non-medical expenses are no longer subject to the penalty, although they are generally taxable as ordinary income. Withdrawals used for qualified medical expenses remain tax-free at any age.

An HSA can be a valuable way to save for future healthcare expenses, but it isn't the right choice for everyone. Before opening one, it's important to understand whether a high deductible health plan fits both your healthcare needs and your budget.

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