A health savings account (HSA) has potential financial benefits now and later. Not only can you save pre-tax dollars in this account to pay for qualified medical expenses, but HSAs can also provide valuable retirement benefits.
Here’s how to take full advantage of an HSA.
What Is an Hsa?
An HSA is a tax-advantaged account that can be used to pay for qualified medical expenses, including co-pays, prescriptions, dental care, contacts and glasses, bandages, x-rays and more. It’s “tax-advantaged” because your contributions reduce your taxable income and the money isn’t taxed while it’s in the account – even if it earns interest or a return on investment. Bonus: If you use your HSA funds for qualified medical expenses, you won’t owe taxes when you withdraw money from the account. These 3 reasons are why HSAs are considered “triple” tax-advantaged.1 This means they provide more tax benefits than retirement accounts like 401(k)s or Individual Retirement Accounts (IRAs).
How Does an Hsa Work?
HSAs work with an HSA-eligible health plan. If you’re enrolled in this type of health plan, you can make pre-tax contributions to an HSA, allowing you to pay for qualified medical expenses tax-free. This can help create a cash cushion to offset the higher deductibles that HSA-eligible health plans typically have.
If you don’t need the money in your HSA for immediate medical expenses, you can save and invest it until you need it. This sets an HSA apart from another popular account, the Health Care Flexible Spending Account (FSA). Unlike an HSA, money held in a health FSA typically must be spent by the end of the plan year in which it was provided, cannot be invested, and cannot be taken with you when you leave an employer.
Who Can Contribute to an Hsa?
Not everyone is eligible to contribute to an HSA, even if they are enrolled in an HSA-eligible health plan. You can only contribute to an HSA if:
- You are not enrolled in a health plan sponsored by your spouse or parent that is not an HSA-eligible health plan.
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s tax return.
- Read more: 6 HSA Benefits in Your 20s and 30s
- Learn more about HSA benefits
Here’s More on What You Need to Know about the Financial Benefits of an Hsa.
Tax-Deductible Contributions HSA contributions are typically made with pre-tax income from your paychecks, similar to how 401(k) contributions are set up. If you fund your HSA with after-tax dollars instead, you can deduct the tax from your personal taxes when you file.
HSA tax deductions can have strong benefits: For example, someone in the 22% federal income tax bracket could potentially save nearly 30% in taxes (federal income + FICA + potentially state income) on every dollar contributed to an HSA. This helps increase the amount of money you have for medical expenses. However, it is important to remember that contributing through payroll deductions will result in the greatest tax savings. Only contributions made through payroll deduction will avoid health insurance and social security taxes.
Your Employer Can Contribute to Your HSA Nearly 80% of employers help employees pay medical expenses through contributions to their HSA.2 Think of it as a 401(k) match for your health. You won’t get a tax deduction on what your employer contributes, but you’ll get extra money that has the potential to grow over time if invested.
You can invest funds held in your HSA By investing at least a portion of your HSA funds, you can potentially build your nest egg for medical expenses that can be especially valuable later in life. According to the Fidelity Retiree Health Care Cost Estimate, the average retired couple age 65 in 2023 may need to save approximately $315,000 (after taxes) to cover health care expenses in retirement.3
HSAs aren’t subject to “use it or lose it” rules. This means you don’t lose any money you don’t use that year, and you can roll it over until you reach the time you want. or you need to use the money in your HSA. Combined with the ability to invest funds, this allows your health savings to benefit from compound returns. Over 30 years of contributing and investing the maximum family HSA contribution in 2023, you could end up with more than $650,000, assuming a 6% return.4
Your HSA is Your Account, Not Your Employer Unlike a health care FSA, which is technically owned by your employer, your HSA belongs to you. So when you leave your job, you keep all the money you’ve saved in your HSA and can transfer it to a new HSA or an employer-sponsored HSA at your next job. You can even open an HSA if you have an HSA-eligible health plan and your employer doesn’t—or if it does, but you prefer a third-party option. It is also possible to have multiple HSAs. Some people have one for investing and one for cash to pay for medical expenses.
You Can Still Have an FSA to Address Certain Immediate Qualified Medical Expenses People often think that the FSA vs. HSA is either/or. Truth: HSA holders may have a limited purpose FSA to pay for qualified dental and vision care expenses. This can help you get the best of both worlds: use an HSA to save for future medical expenses while funding some current ones with an FSA. You can only open a limited purpose FSA if your employer allows it.
Starting at age 65, there is no penalty if you use HSA money for non-qualified medical expenses. However, you will have to pay income tax, similar to withdrawals from other retirement savings vehicles such as a traditional 401(k) or IRA. It’s important to note that before you turn 65, you’ll face a 20% penalty — plus any applicable taxes — on withdrawals that aren’t used for qualified medical expenses.
HSAs Are Not Subject to Required Minimum Distributions (RMDs) Unlike 401(k)s and traditional IRAs, which require you to start taking minimum withdrawals called RMDs when you reach age 73.5, you never have to withdraw any funds from your HSA. This can provide versatility in retirement income planning.
HSA contribution limits
Contributing early and often to your HSA and investing those savings can help you better afford medical care later. The contribution limit for 2023 is $3,850 for individual coverage and $7,750 for family coverage.
Both you and your employer can contribute to your HSA, although the contribution limit remains the same regardless of how much your employer contributes. For example, if your employer contributes $1,000 to your HSA, you’ll only be able to contribute $2,850 if you’re enrolled in individual coverage in 2023.
Additionally, depending on when you enroll in an HSA-eligible health plan and how long you remain enrolled, your total contribution limit may be reduced. You also usually have until the federal tax filing deadline (usually April 15) to contribute to an HSA for the previous tax year.
How to Open an Hsa
Step 1: Make sure you’re eligible to open an HSA To open and contribute to an HSA, you must be enrolled in an HSA-eligible health plan. This health plan does not have to be provided by your employer, but it must meet the above requirements. If you are unsure whether your plan qualifies, contact your benefits administrator or plan provider.
Step 2: Choose an HSA Provider While HSAs are all similar in the tax benefits they offer, the specific features available at different providers vary. For example, if you’re interested in investing your HSA, you may want to go with a provider that requires no — or low — amount of your HSA to remain uninvested in cash. You may want to investigate whether potential HSA providers offer low-cost funds or automated investment options such as robo-advisors that meet your needs. You may also want to compare fees with different providers. Also, remember that you may have the flexibility to change your HSA provider even if you are no longer covered by an HSA-eligible health plan.
Step 3: Don’t Forget to Invest Your HSA If you plan to use your HSA to save for long-term medical expenses, don’t forget to set up your investments. Nearly 80% of participants do not invest their HSA assets6, indicating that the vast majority of Americans are not using this valuable wealth-building tool as well as they could.
1. With respect to federal taxation only. Contributions, investment income and distributions may or may not be subject to state taxation. Consult your tax advisor for the specific situation.
2. “2022 Health Savings Account Survey,” Plan Sponsor Council of America, 25 Oct. 2022
3. Estimate based on one person retiring in 2023, age 65, with life expectancy consistent with Healthy Annuitant RP-2014 rates assumed with MP-2020 mortality improvement scale from 2022. Actual assets needed may vary depending on current health, area of residence and longevity. Estimate is exclusive of taxes. The Fidelity Retiree Health Care Cost Estimate assumes that individuals do not have employer-provided retiree health care coverage but are eligible for the federal government’s insurance program, the original Medicare. The calculation takes into account basic Medicare Part B premiums and cost-sharing reserves (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient health insurance). It also considers Medicare Part D charges (prescription drug coverage) and out-of-pocket costs, as well as some services excluded by original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.
4. This calculation assumes you start contributing at age 30 and contribute annually up to the 2023 HSA contribution limit for family coverage of $7,750 over that period. This example also assumes a 6% rate of return, no withdrawals during that 30-year period, and annual HSA contributions to match an additional $1,000 starting at age 55 until the end of the 30-year time frame.
5. The change in the RMD age requirement from 72 to 73 applies only to individuals who turn 73 on or after January 1, 2023. After age 73, the IRS generally requires you to take RMDs from your tax-advantaged retirement each year. accounts (except Roth IRAs and Roth accounts in employer retirement plan accounts after December 31, 2023). Talk to your tax advisor about the impact of this change on future RMDs.
6. Sponsor’s Schedule, October 25, 2022
This information is intended for educational purposes and is not tailored to the investment needs of any particular investor.
Recently enacted legislation has made a number of rule changes related to defined contribution, defined benefit and/or individual retirement plans and 529 plans. The information provided here may refer to or be based on certain rules in force prior to this legislation and the current rules may differ. As always, you should consult your personal tax advisor before making any retirement planning decisions or withdrawals.
Fidelity does not provide legal or tax advice. The information provided here is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can have a significant impact on investment results. Fidelity cannot guarantee that the information contained herein is accurate, complete or current. Fidelity makes no warranties with respect to such information or the results obtained from its use, and disclaims any liability arising from your use of or any tax position taken in reliance on such information. Consult an attorney or tax professional regarding your particular situation.
