Health Savings Account (HSA): How HSAs Work, Contribution Rules

A Health Savings Account (HSA) is a tax-advantaged savings account designed for individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions to an HSA can be made by the individual or employer up to a specified annual limit. These contributions are tax-free and can be invested for growth, with tax-free withdrawals for qualified medical expenses, which include medical, dental, vision care, and prescription drugs. HSAs offer several advantages: contributions are tax-deductible, account earnings grow tax-free, and distributions for medical expenses are tax-free. However, HSAs require accompanying HDHPs, which have high deductibles but lower premiums.

Eligibility for an HSA requires having an HDHP, no other health coverage, not being enrolled in Medicare, and not being claimed as a dependent. Annual contribution limits for 2024 are $4,150 for individuals and $8,300 for families, with catch-up provisions for those 55 or older. Contributions can be made by various sources, including self-employed individuals, provided eligibility criteria are met.

HSAs differ from Flexible Spending Accounts (FSAs) in that unused funds roll over and are portable, allowing them to be retained after changing jobs. Withdrawals for non-qualified expenses are taxed and penalized, except after age 65 when only taxes apply. HSAs cannot generally be used for insurance premiums, except for specific cases like COBRA, Medicare, or long-term care insurance. An HSA is a powerful tool for saving and investing in medical expenses, offering a triple tax advantage: pre-tax contributions, tax-free growth, and tax-free distributions for qualified expenses. Starting an HSA early can significantly benefit one's financial planning for medical expenses, especially approaching retirement.