How does a Health Savings Account Work?

A Health Savings Account (HSA) isn’t just for medical bills today — it can also be a powerful tool for saving money and building wealth for the future. From tax breaks to retirement perks, an HSA offers serious advantages.

Let’s break it down so it’s easy to understand — and even easier to make the most of it.

So, What Exactly Is an HSA?

Think of an HSA as a special savings account just for health care expenses. You can use it to pay for things like:

• Doctor visits
• Prescriptions
• Dental care
• Eye exams, glasses, and contacts
• Even things like bandages and X-rays

But here’s where it gets interesting — HSAs come with three tax benefits:

1. You don’t pay taxes on the money you put in (as long as it’s pre-tax from your paycheck).
2. The money grows tax-free, even if you invest it and earn returns.
3. Withdrawals are tax-free too, as long as you use the money for qualified medical expenses.

That’s why HSAs are often called “triple tax advantaged” — even more tax-friendly than 401(k)s or IRAs.

How Does an HSA Work?

To open and contribute to an HSA, you need to be enrolled in an HSA-eligible high-deductible health plan (HDHP). Once you’re in, you can:

• Put money in before taxes are taken out of your paycheck
• Use the funds for qualified medical expenses — tax-free
• Save and invest unused funds to grow over time

This helps offset the higher deductible of your health plan and lets you build a cushion for future medical needs.

Also Read: What Documents do I Need to Enroll in Health Insurance?

What Makes an HSA Different from an FSA?

Unlike a Flexible Spending Account (FSA), you don’t have to use your HSA money by the end of the year. The money in your HSA:

• Rolls over year after year
• Stays with you, even if you change jobs
• Can be invested, like a retirement account

FSAs don’t offer these same perks — the money usually expires at year-end, can’t be invested, and doesn’t follow you when you leave your job.

Who Can Contribute to an HSA?

You can only put money into an HSA if:

• You have an HSA-eligible high-deductible health plan
• You’re not enrolled in Medicare
• You’re not claimed as a dependent on someone else’s tax return
• You’re not on a spouse’s or parent’s non-HSA-eligible health plan

Also Read: Are there Hidden Fees in Oscar Health Plans?

More HSA Benefits You Should Know About

✅ Tax Savings Add Up Fast
If you’re in the 22% tax bracket, contributing to an HSA could save you nearly 30% in taxes (including federal, FICA, and maybe state income tax). The best tax savings come from payroll contributions, which also avoid Medicare and Social Security taxes.

✅ Your Employer Might Chip In
Around 75% of employers contribute to employees’ HSAs — it’s like a 401(k) match, but for health care! You don’t get a tax deduction for their part, but free money is always a win.

✅ You Can Invest Your HSA Funds
Once you’ve saved a certain amount, you can invest the rest of your HSA money in mutual funds or ETFs. Over time, this can grow into a sizable medical nest egg — especially helpful in retirement.

✅ No “Use It or Lose It” Rule
Unlike FSAs, your HSA balance stays with you forever. Didn’t use it this year? No problem — it keeps growing.

✅ It’s Your Account, Not Your Employer’s
Your HSA is yours to keep. Leave your job? You take your HSA with you. Want to switch providers? You can. Prefer having one HSA for investing and another for spending? That works too.

✅ You Can Still Use an FSA (Kind of)
If your employer allows it, you can open a limited-purpose FSA to cover dental and vision costs. That way, you can keep your HSA money growing while still covering immediate needs.

✅ At Age 65, You Can Use HSA Money for Anything
Once you turn 65, you can use HSA money for non-medical expenses without the 20% penalty — you’ll just pay income tax, like with a 401(k). Before 65, you’d pay tax plus a 20% penalty if it’s not used for qualified medical costs.

✅ No Required Withdrawals
Unlike 401(k)s or IRAs, HSAs don’t require minimum withdrawals at any age. That gives you more control over your retirement planning.

Also Read: What’s the Difference Between In-Network and Out-of-Network Coverage?

HSA Contribution Limits (2025 & 2026)

Here’s how much you can put into your HSA each year:

Year	Individual	Family
2025	$4,300	$8,550
2026	$4,400	$8,750

Catch-up tip: If your employer contributes, that amount counts toward your limit. So if they put in $1,000 for 2025, you can only add $3,300 more for individual coverage.

Also, you typically have until April 15 of the following year to make contributions for the previous tax year.

How to Open an HSA in 3 Simple Steps

Step 1: Check if You’re Eligible
Make sure you’re on an HSA-eligible health plan. Not sure? Ask your HR team or insurance provider.

Step 2: Choose a Good HSA Provider
Look for a provider that offers low fees, investment options, and maybe automated investing (like a robo-advisor). Even if your employer offers an HSA, you can pick a different one if you want better features.

Step 3: Set Up Investments (Don’t Skip This!)
Less than 20% of people invest their HSA — don’t be one of them! If you’re not using the money right away, investing it can really grow your savings over time.