How can a health savings account help me?

Read time: 6 to 7 minutes

Retirement plans, IRAs, annuities ... there are lots of ways to save for retirement. But there’s just one type of account that can help you save for retirement and cover your medical costs—today and in the future. Here's what you need to know.

Introducing: The health savings account

Getting sick can be expensive—especially with rising health care costs. Insurance plans can cover some of the cost, but perhaps not all of it.

So how can you make up the difference? Well, if you’re covered by a high-deductible health plan at work, you can save in a health savings account (HSA).

An HSA is a savings account outside your workplace retirement plan where you can save money to pay for medical costs now and in the future.

Let’s face it, we’re not perfect. We make bad decisions, eat food that’s not good for us, take dangerous selfies, and, occasionally, get sick.

HELPFUL HINT

A high-deductible health plan, which is required to have an HSA, might not be for you if you want to pay a lower deductible, expect to pay high medical bills soon, or are enrolled in Medicare.

The HSA triple tax advantage

An HSA is helpful for people who want to save on taxes.*

Like your employer plan, you save money in an HSA pre-tax.
Any earnings on your money grow tax-free.
If you use the money you withdraw for qualified medical expenses, your withdrawals are tax-free. Yes, tax-free.

Other HSA advantages

Unlike in flexible spending accounts, you don’t lose the money you save in your HSA at the end of the year. It rolls over, year after year, until you’re ready to use it.
You can roll over the money in your HSA to a new one if you leave your employer.
Your HSA is designed for medical expenses, but you can use it for anything after age 65. (Note that you’ll be taxed if it’s not used for medical expenses.)

*Taxes: You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you’re under age 65, you may also face a 20% federal penalty tax.

Here’s how much you can save—and when

Like your employer plan, there are limits to how much you can contribute to your HSA each year. Those limits depend on who’s covered in your high-deductible health plan (HDHP). In 2024, you can save this much:

$4,150 if your HDHP covers you as an individual.
$8,300 if your HDHP covers your family.

If you’re age 55 or older, you can add $1,000 to either of those limits.

Like your employer plan, contributions to your HSA come straight out of your paycheck. You can change your contribution at any time.

Now, not that you’d ever do this, but if you’re enjoying yourself on New Year’s Eve and suddenly realize that you forgot to make a contribution to your HSA this year, don’t worry! You usually have until April 15 of the new year to make a contribution for the previous year.

Nothing taxing here

The money you save in your HSA is never federally taxed.* (We’ll wait while you pick up your jaw from the floor.)

Nope, never taxed as long as you use the money for qualified medical expenses, which are things like doctor visits, hospital stays, dental procedures, and prescription drugs.

When you spend it on medical expenses, your money goes in pre-tax and comes out tax-free. Any earnings you make on long-term savings in your HSA are also tax-free.

If you withdraw money from your HSA for something besides medical expenses, you’ll be taxed at your normal rate, including a possible 20% penalty if you’re under age 65. (We’re sorry. We don’t make the rules.)

Invest for growth—in the fast lane

A 65-year-old could expect to pay in the neighborhood of $5,100 each year on health care, on average. The actual amount will vary based on such factors as gender, general health level, and geography.*

Sure, $5,100 or so per year is a lot—and there are certainly other things, even better things, that you’d prefer to spend your retirement savings on. The growth opportunities of your HSA can help.

Depending on your plan, once the balance in your HSA reaches a predetermined amount (set by your employer), you may be able to invest some of that money for the long term in mutual funds.

The earning power of diversified mutual funds can help your savings grow a lot faster than if they were in cash. But it gets even better. The money in your HSA can grow tax-free.**

So whether you’re safeguarding against rising health care costs or chasing that retirement dream, your HSA can be a versatile tool to help you save money for your future.

*Source: Planning for Health Care Costs in Retirement, Mercer Health and Benefits, and Vanguard, 2021.

**Taxes: You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you’re under age 65, you may also face a 20% federal penalty tax.

Whenever you invest, there’s a chance you could lose the money. Diversifying means having different types of investments. It doesn’t guarantee you’ll make a profit or that you won’t lose money.