HSA 101: Understanding Health Savings Accounts

November 16 2022
health savings accounts

You can save with Health Savings Accounts (HSAs)—but know the details



Health savings accounts, or HSAs, have been growing in popularity since their introduction in 2003, and for good reason: they can provide some serious tax savings. Total HSA holdings are forecasted to hit $150 billion by the end of 2024.  Understanding health savings accounts can be a little tricky but their potential upside makes learning about them well worth your while. 

With an HSA, you can put aside a percentage of your pre-tax earnings to go toward a special savings account that you can draw against for qualified medical expenses. It’s like a 401(k) plan for your health care. By contributing to an HSA you can reduce your annual taxable income while creating a pool of funds to tap into for medical needs.

If you don’t have a lot of healthcare expenses right now, no problem. Just leave your balance be, and watch your money grow. Unlike with a flexible spending account, you won’t have to forfeit your money if you don’t use it by the end of the year. Your unused HSA funds can roll over into the following years and your savings continue to accumulate. You can use your HSA account savings for medical expenses in the future. 

And HSAs don’t just reduce your annual taxable income: they offer a triple-tax-advantage that’s hard to match.

So what’s the catch? 

Like with any investment plan, there are a few HSA rules and regulations to know about before you dive into the HSA pool. HSAs have some nuances that might not work for you. You’ll want to factor in details like your monthly budget, general health, and anticipated healthcare needs for the year ahead when weighing whether to take the plunge. 

This guide outlines the advantages and disadvantages of HSA plans to help you determine whether they are the right fit for you and your family.



The potential tax savings alone are one reason why it's worth understanding health savings accounts.



HSAs: Understanding How They Work



HSAs Work with High-Deductible Health Plans



HSAs are offered as part of a high-deductible health plan (HDHP). HDHPs are what they sound like: health plans that have lower monthly premiums, but higher minimum deductibles you need to pay in full out of your pocket before plan payments start to kick in. 

The US federal government sets HDHP limits annually. For 2023, the minimum deductible is at least $1,500 per individual, or $3,000 per family. 

Contributing to an HSA reduces your annual taxable income, and creates a reservoir of funds for qualified healthcare needs. It’s an extensive list: doctor visit costs, drug prescriptions, dental and vision care, lab fees, physical therapy, ambulances and hearing aids are all qualified expenses. There are many more.

The key word here is “qualified.” Not all of your medical needs will fit the HSA reimbursement guidelines. The good news is the HSA qualified expense list is often more comprehensive than traditional health plan coverage, and HSA funds can be used to pay down your deductible, too. 

One thing to consider: If you have a lot of medical expenses in the year ahead, you’ll have to be ready to fork over the cash yourself to pay your entire deductible before plan payments begin. Things like recurring prescriptions or specialist care can quickly add up.

The government sets the maximum HSA contribution level limits each year, too. For 2023, you can put aside up to $3,850 for an individual HSA account, or $7,750 for a family account. 

  • Fun fact #1: Anyone can contribute to your HSA, including your family, friends, and employers. 
  • Fun fact #2: If you’re over age 55 you can save an additional $1,000 each year in catchup contribution to your HSA until age 65.
  • Fun fact #3: At 65, you can withdraw from your account even for non-medical expenses without penalty.

Once you hit 65 years old, you can start to use your accrued HSA savings to pay for Medicare. If you’re still working after 65 and don’t take Social Security, you can still contribute to an HSA.



The HSA Triple Tax Advantage



One strong benefit of an HSA account is what’s known as the triple tax advantage. HSAs allow you to save on taxes in three ways: 

  • Tax-free contributions. Your HSA contributions are taken out of your paycheck before taxes, via a payroll deduction. Any contributions you make to your HSA during the year can be deducted from your annual income tax. 
  • Tax-free withdrawals for qualified medical expenses. You can pull money out of your HSA to pay for any qualified healthcare costs without having to pay any taxes.  
  • Earned interest and investment opportunities. HSA accounts accrue interest. Once you reach a minimum savings threshold (usually $2,000) you can opt to invest your saved funds into stocks, bonds or mutual funds. Better yet, the interest and earnings from these accounts can grow tax-free. 

Of note, most HSA account owners don’t take advantage of this investment potential that the plans provide. In fact, nearly 91% of HSA account owners keep their account balance in cash

Those who don’t invest their HSA may be leaving opportunity on the table: HSA savers can invest their cash in mutual funds, ETFs, individual stocks, savings bonds – even cryptocurrency. These funds can provide great peace of mind when you’re heading into retirement age. 



HSA Pros & Cons to Consider



There’s a lot to unpack when it comes to understanding HSA plans. Here are a few benefits— and potential drawbacks to consider.

1) The Triple Tax Advantage! That’s like a bunch of free money, right? 

1a). Well, yes and no. It’s true HSAs have a lot of tax benefits, but there are rules for how you can access your funds. You can always use your HSA account for qualified medical expenses. But if you want to tap into your funds for non-medical uses before you turn 65, you’ll get tagged with a 20% early withdrawal penalty. 

At age 65, you can access your cash without having to pay that penalty. But unless you withdraw from your account to pay for medical expenses, you’ll still have to pay taxes on the earnings. So it’s not totally free, no-strings-attached money. But an HSA can be a seriously useful savings tool for medical expenses in your retirement years. 

2). How about all of those qualified expenses! Absolutely, HSA accounts can be used on a lot of qualifying expenses. Some pretty unique ones, too, that often aren’t covered by insurance plans—acupuncture, anyone? When you consider HSAs can be used for things like copays, dental expenses and vision costs, setting one up makes a lot of sense.

2a). HSA funds don’t pay for everything. You can’t use your HSA for your monthly premiums. It won’t cover most over-the-counter medication, either. Elective cosmetic surgery is typically out. And sorry, no gym memberships. Womp womp. 

3). HSA’s can be a big win if you’re self-employed. Even if you don’t itemize your taxes, that’s OK: HSA contributions are considered above-the-line deductions, meaning you can still take the write-off without itemizing. Raking in tons of cash? That’s great! And it’s great to know that even high-earning self-employed individuals can contribute to an HSA.

Getting your HSA through your work? Check to see if they offer matching contributions, like some companies do with your 401K. If your company kicks in, that’s a win too. You’d still be bound to the annual maximum contribution levels, though.

3a) HSAs lose some luster if you have steady healthcare expenses—or a surprise accident. Since they’re attached to a high deductible health plan, HSAs may require some out-of-pocket payments early in your plan year. An unexpected incident like a broken thumb playing softball can mean you’ll need to buck up for that deductible unexpectedly. If you have steady healthcare needs like prescription medications, you’ll have to pay those up front before the deductible kicks in, too.

While you’ll still get the benefit of reducing your annual pre-tax income with an HSA, if you know you’re going to have a lot of healthcare expenses in the year ahead, you’ll miss out on some of the longer-term investment benefits of an HSA.

4) Many HSA accounts provide a debit card. You can use this for medical expenses. Pretty convenient.

4a)Some HSA accounts have monthly administration fees. Kinda annoying. 



Some Final HSA Thoughts



A few other things to keep in mind about HSAs:

  • HSA funds don’t expire. The funds stay in your account until you use it.
  • Your HSA is transportable: if you leave your job, your HSA comes with you. 
  • You might be able to use your HSA funds for your spouse or dependents, even if your HDHP doesn’t cover them. 
  • If you pass away, your HSA balance can be transitioned to an account beneficiary and used without penalty. Just make sure you name that account beneficiary.

Whether retirement is looming or a fair way away, healthcare costs are only rising. The average American couple at age 65 in 2022 might need approximately $315,000 to cover health care needs in retirement

With eye-popping numbers like that, the promise of an HSA account takes on an added level of urgency.

If you’re considering an HSA but aren’t sure about it, or if you have healthcare plan questions in general, book some time for a presentation with one of Clearwater’s agents today.








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