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Health Savings Account – What Is It and How to Open It?

Have you ever imagined you could save for all your medical expenses yet have tax-free transactions related to these medical costs? You can do so with a health savings account (HSA).

A triple-taxed advantaged medical savings account, an HSA will help you set aside some money from your income to save for unexpected medical costs primarily not covered in your high-deductible insurance plan.

But what is an HSA, and what are the rules for a health savings account? Continue reading this detailed guide to get all your questions answered!

What is a Health Savings Account?

Think of an HSA (Health Savings Account) as your personal piggy bank for medical expenses. It’s a tax-advantaged account that helps you save for unexpected healthcare costs that your high-deductible insurance plan might not cover. The HSA is available to individuals enrolled in a high-deductible health plan (HDHP), a health insurance plan with higher deductibles and lower premiums than traditional insurance plans.

This is a tax-advantaged account, so the money in it is not taxed since you are already contributing to HDHP. The money in your health savings account is not eligible for tax deduction even when you are earning investment returns or interest on it.

Unused funds for the entire year are rolled over. Since HSA funds are yours entirely, you can invest them further to build financial security during unexpected medical emergencies or use them as retirement savings. Further, unused health savings account funds can be added as a supplement to your retirement funds post the age of 65, but those funds may be subject to tax deductions.

How Would Health Savings Accounts Work?

As mentioned above, people with high-deductible health plans (HDHP) can open an HSA. The funds in your health savings account grow tax-free. So, withdrawals made for medical expenses not covered by major medical insurance are tax-free. This triple tax advantage (tax-deductible contributions, tax-free growth, and tax-free withdrawals) makes HSAs very attractive for saving money for medical expenses.

What sets an HSA apart from other accounts is its flexibility. If you do not use the funds in your HSA by the end of the year for the medical expenses it is intended for, you can save them for the future.

Health Savings Account Contribution Limits

To take the maximum benefit of your HSA funds, you need to understand the health savings account contribution limit.

You and your employer can both contribute to your HSA with a maximum contribution limit of $4,150 for an individual and $8,300 for a family in 2024. People above the age of 55 can contribute an additional $1,000 as a catch-up contribution.

What Expenses Can a Health Savings Account Cover?

HSA funds can be used to pay for a wide range of qualified medical expenses incurred by you, your spouse, a family member, or other dependents in the HSA plan. These expenses include deductibles, copayments, coinsurance, and some other expenses not covered by your health insurance plan, such as vision and dental care.

Other expenses covered in your health savings account include:

  • Prescription medicines
  • OTC medications
  • Medical equipment like bandages, blood sugar test kits, and more
  • Menstrual care products
  • Psychiatric care, like therapy and counseling sessions
  • Physical care like chronic pain management and post-injury rehab

Health Savings Account Eligibility Requirements

Below are the eligibility requirements set for a health savings account set by the IRS (Internal Revenue Service):

  1. Should be Enroled in HDHP: To be eligible, your health coverage must meet the criteria of a high-deductible health plan (HDHP). For the 2024 calendar year, an HDHP should feature a minimum annual deductible of $1,600 for individual coverage or $3,200 for family coverage. Additionally, the plan’s annual out-of-pocket maximum should not exceed $8,050 for individuals or $16,100 for families. Qualifying out-of-pocket expenses encompass deductibles, copayments, coinsurance, and similar costs, excluding premiums for health insurance policies.
  2. Shouldn’t Have Other Health Coverage: Apart from having an HDHP, you cannot have other health coverages to be eligible for a health savings account. This also means that you cannot be covered by another person’s health coverage plan that is not the HDHP.Individuals with Health Reimbursement Accounts or Flexible Spending Accounts are also ineligible for HSA. People covered by military health benefits like TRICARE are also not eligible for health savings accounts.
  3. Shouldn’t be Enrolled in Medicare: Medicare enrollment typically begins at 65, and you cannot contribute to HSA if you are contributing to Medicare.
  4. Shouldn’t be a Dependent: If you meet the criteria to be claimed as a dependent on someone else’s tax return, you cannot contribute to your own HSA. However, being a dependent means you might be covered by someone else’s HDHP and benefit from their HSA. This often happens when a young adult is still claimed as a dependent and is under a parent’s HDHP. In this situation, the parent can use HSA funds to cover the dependent’s eligible medical expenses.

Health Savings Account Rules

While it is a flexible account, you must follow certain health savings account rules.

An HSA offers portability, allowing employees to retain their HSAs even when transitioning jobs. Furthermore, in the event of the account holder’s demise, the HSA plan can be transferred to their surviving spouse without incurring taxes. However, if the designated beneficiary is someone other than the spouse, the account loses its HSA status. In such a scenario, the beneficiary is taxed based on the account’s fair market value, considering any qualified medical expenses paid from the account within one year of the account holder’s death.

Health Savings Account Benefits

Since this account is meant to take the burden out of your mind during a medical emergency, there are several benefits of a health savings account:

  1. Qualified for Several Expenses: A health savings account is probably one of the only savings accounts that help you cover all the minor expenses that major health coverage plans refuse to cover. This includes a huge range of dental, vision, medical, and mental health services.
  2. Eligible for Contributions by Others: The biggest benefit of a health savings account is that anyone can contribute to it. Your relative, spouse, you, and your employer—anyone willing to contribute to your HSA can do so.
  3. Make Pretax Contributions: Your employer deducts contributions from your paycheck using pretax dollars, meaning taxes aren’t withheld on these funds. Consequently, this amount isn’t counted towards your gross income and isn’t liable for federal income taxes. Additionally, in the majority of states, these contributions are exempt from state income taxes.
  4. After-tax Contributions Eligible for Tax Deduction: When you contribute funds using after-tax income, you have the opportunity to deduct this amount from your gross income when filing your taxes, thereby decreasing your taxable income for the year. For instance, if you are an individual younger than 55 years old, the maximum allowable contribution to a Health Savings Account (HSA) is $4,150 in the year 2024.Therefore, if you have only deposited $2,600 into your HSA via payroll deductions by the conclusion of 2023, you retain the option to add an additional $1,550 to diminish your tax obligation further. Typically, you have until the IRS tax filing deadline to make these contributions.
  5. Make Tax-free Withdrawals: If you use your HSA funds for qualified medical reasons, you can usually make tax-free withdrawals. In the interim, funds held within an HSA can be utilized for investment purposes. This allows for the acquisition of stocks, bonds, and various asset classes, aiming to enhance potential gains. Many financial experts typically recommend cautious investment approaches, such as allocating funds to U.S. Treasury bonds. Primarily, this account serves as a reserve for unforeseen medical costs.
  6. Take Tax-free Earnings: Interest or any other gains generated from the funds in the account are exempt from taxation. The majority of Health Savings Accounts (HSAs) typically yield a negligible amount of interest, often below 0.1%.
  7. Roll-over Your Annual Unused Funds: This is the biggest advantage of a health savings account. You can roll over your HSA funds if they are unused by the end of the year. You cannot do this in a Flexible Spending Account, where you can roll over the amount only if it is up to $550.
  8. Portable: Your Health Savings Account (HSA) funds are accessible for future qualified medical expenses, irrespective of alterations in your health insurance plans, transitions to different employers, or retirement. Essentially, your HSA functions as a personal bank account, affording you the autonomy to determine the utilization of funds according to your preferences and needs.
  9. Highly Convenient: The majority of health savings accounts provide a debit card for payment of eligible expenses, including prescription medications. Should you opt to await a mailed bill, you can contact the billing center and utilize your HSA debit card for phone payments. Additionally, reimbursement from an HSA is feasible if medical expenses were initially paid through alternative means.

Health Savings Account Disadvantages

While the benefits of a health savings account are highly enticing to go after, before opening one, you also need to see the full picture by understanding the cons. Here are some disadvantages to consider before opening an HSA:

  1. Requirement of HDHP: Having an HDHP is a prerequisite for eligibility for an HSA. Such a plan may impose a heavier financial strain compared to alternative health insurance options. Despite the lower monthly premiums, it might prove challenging—despite having funds in an HSA—to gather sufficient cash to cover the deductible for a costly medical treatment. This aspect warrants contemplation for individuals anticipating substantial medical expenses within a given plan year.
  2. Financial Pressure to Save: Certain individuals might hesitate to pursue medical attention when necessary due to their reluctance to utilize funds from their health savings accounts.
  3. Applied Penalties and Taxes: If funds are withdrawn for expenses that don’t qualify before you reach the age of 65, taxes will be due on the amount, along with a 20% penalty. Upon turning 65, taxes will still be owed, but the penalty will be waived. This situation can be challenging for individuals confronted with an unforeseen expense unrelated to medical matters. They’ve diligently saved the funds but are unable to utilize them without enduring a financial setback.
  4. Keep Records: Keeping receipts of where and when you used your HSA funds is necessary, as the Internal Revenue Service (IRS) will check them when you are audited.
  5. Charged Monthly Maintenance Fees: Certain institutes that provide health savings accounts may impose a monthly maintenance charge or a fee per transaction, the amounts of which can differ depending on the institution. Although these fees are generally not exorbitant, they tend to surpass any interest accrued in the account, thereby affecting your overall earnings. Occasionally, these fees are exempted, provided you uphold a specific minimum balance.

How to Open an HSA

Step 1: Check your eligibility

Once you have weighed all the pros and cons of opening an HSA, you need to check whether you are qualified to do so. To open an HSA, you need to have an HSA-eligible health plan provided by your employer.

Step 2: Choose a health savings account provider

While all HSAs share similar tax advantages, the specific attributes offered by different providers can differ. If you are considering investing in an HSA, selecting a provider that mandates either no or minimal cash reserves within the account might be preferable.

It’s advisable to explore whether potential HSA providers offer cost-effective investment options or automated investing services that align with your preferences. Additionally, it’s important to compare fees among various providers. It’s worth noting that individuals have the freedom to switch HSA providers even if they no longer have coverage under an HSA-eligible health plan.

Step 3: Remember to invest your HSA

If your goal is to utilize your HSA for long-term medical savings, it’s crucial to establish investment options. Maximize the potential of your HSA for more wealth accumulation by investing it.

Health Savings Account vs Flexible Spending Account

Like HSA, a Flexible Spending Account (FSA) is also used for medical expenses. But there are key points of differences between the two:

  • Only employed individuals can open an FSA since it is an employer-sponsored plan.
  • Funds remaining unused within the FSA for a specific tax year cannot be carried forward and are lost upon the conclusion of the year.
  • The designated contribution sum for an FSA remains constant, unlike contributions to HSAs.


Should you open a health savings account? That entirely depends on your financial needs and capabilities. In situations like these, it’s wise to seek the help of a financial advisor, as all of this affects your retirement savings and investing plans.

At SD Retirement Plans, we are committed to helping individuals like you better understand your retirement plans and give you advice that is best suited to your needs. Contact us to take control of your retirement funds!

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What happens to my HSA if I leave my job?

The health savings account is never tied to your employer; it is your account, and so it goes with you if you leave your job. You can continue using your HSA funds for qualified medical expenses even after you quit your job, as long as you are still covered under HDHP.

Am I allowed to use my HSA to cover my family’s medical expenses?

Even if the HSA is opened by a single person, you can still use it to cover the HSA-qualified medical expenses of your family members. This holds true even if your family members are not covered under an HDHP as long as these medical expenses are not reimbursed by another HRA or HSA.

What will happen to my unused HRA at the end of the year?

You can always roll over your HSA funds year to year, as they don’t have an expiration date. This feature helps you collect your HSA balance and allows you to use it now or in the future.

What will happen to my HSA after I turn 65?

Once you turn 65 and apply for Medicare, you can no longer contribute to your HSA. However, you can still use your funds in the account at any time. Moreover, after 65, you can use your HSA funds for non-medical purposes without the imposition of a 20% penalty, but you will still incur income tax on those withdrawals.

How do I check the balance of my HSA funds?

Depending on the financial institution with whom you have opened your HSA, there are several ways you can check your HSA fund balance. Those include:

  • Check online: You will get an online account of your HSA where you can simply log in, just like online banking.
  • Take printed statement: You can also check your HSA balance and all the recent transactions done through your HSA funds in the printed statement.
  • Download the phone app: The financial institution with whom you have your HSA might also have a mobile app that can help you check your latest statement, all transactions, and HSA fund balance.
  • Contact customer service: If you still need help checking your HSA fund balance, you can contact your HSA provider’s customer service for assistance.

Can I still open an HSA if I am self-employed?

Yes, you can open an HSA even if you are self-employed because the only prerequisite for opening an HSA is having an HDHP. So, as long as you have an HDHP, you can open an HSA even if you are self-employed through banks and other financial institutions.

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