* This article was originally published on June 5, 2019. It has been updated for 2025.

Let me start with three simple words: I love HSAs.

As its namesake indicates, a health savings account (HSA) is a savings account for your health care. That said, loving the HSA might sound like a bold statement. An HSA might not seem all that “lovable” right off the bat, but HSAs are also so much more than what’s in the name. Their real value lies in the fact that HSAs have …

• upfront tax benefits similar to a deductible traditional IRA,
• tax-free withdrawal benefits similar to a Roth IRA, and
• the ability to contribute regardless of income.

That means, by saving in an HSA, account holders get to skip out on paying income taxes (and possibly payroll taxes) on the cash they stash there. It comes down to more of your money going toward your needs — and less going to Uncle Sam.

To better understand the benefits inherent in HSAs, let’s take a little trip back in time.

A (Very) Brief HSA History

Predecessor MSAs, or Medical Savings Accounts, were available in some states as early as 1996. MSAs are similar to tax-free savings accounts, created to avoid insurance overuse by shifting some of the cost burden to consumers.

Then, not that long ago — in 2003 to be exact — former President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act, creating HSAs. HSAs are much more widely used today, although MSAs are still available in some states.

How HSAs Work

While HSAs may seem a bit confusing at the outset, they’re rather simple to understand and use. Let me break down the basics.

To be eligible to open an HSA, you must have coverage through a high-deductible health plan (HDHP). What does “high-deductible” mean, exactly? The requirements to qualify as an HDHP change annually. Generally, your health insurance policy must have a minimum deductible and a maximum out-of-pocket limit. These differ between individual and family policies. Although HDHPs tend to have higher deductibles, having an HDHP usually means paying lower monthly premiums.

If your health care plan meets the qualifications, you can open an HSA. Sometimes you will find that the HSA is bundled with your health insurance or through your employee benefits. But you can also open an HSA at a bank, credit union, or brokerage. With an HSA-eligible health insurance plan, you can contribute a limited annual amount to an HSA. This limit varies depending on whether your HDHP covers only yourself or you and at least one dependent or your spouse. The family limit is usually double the individual limit. Plus, if you’re 55 or older, you can add an extra $1,000 “catch-up” contribution, allowing you to save more before retirement.

How do you contribute? Many employers allow their employees to make deposits directly into their HSAs through payroll. If you don’t have this option, you can contribute after-tax dollars and deduct any contributions from your gross income on your tax return.

What HSAs Do — and the HSA Triple Tax Advantage

Now that you understand what you can do with an HSA, let’s explore what an HSA could do for you:

• You may be able to add cash to your HSA tax-free. Growth in your account is also tax-free. When applied to qualified medical expenses, the funds you take out of an HSA are tax-free. That’s a triple tax advantage!
• Using tax-advantaged HSA funds to pay for health care essentially means paying less overall.
• Setting money aside regularly to build up your HSA is an easy way to build a good habit of saving.
• You’ll have the funds available for some of life’s most potentially expensive emergencies.
• You can spend funds from your HSA via a credit card. Eligible expenses include copays, prescriptions, deductibles, and more. This even includes eye doctor and dentist expenses.
• If you later select a health insurance policy that isn’t HSA-eligible, you can’t continue to fund the account. However, you can keep your funds in the HSA to grow or use them to pay for qualified medical expenses under your new policy.
• Your employer can contribute to your HSA (which counts against your contribution limit — but hey … free money!).
• If you don’t use the funds in your HSA before the end of the year, the funds roll over to the next year. There’s no “use-it-or-lose-it” risk.
• You can do a one-time tax-and-penalty-free funding rollover from your IRA into your HSA.
• If you don’t want to pay for qualified health care expenses from your HSA right away, you can employ “shoeboxing.” This means setting medical receipts aside. You can use these receipts to claim tax-free withdrawals at a later time. This can even be years in the future, if you’d like.
• Once you’re Medicare-eligible, you can no longer contribute to an HSA. However, you can then use funds in your HSA for any reason. The distributions, while no longer subject to tax penalty, would be taxed as ordinary income like a traditional IRA.

Knowing these benefits, it’s clear why HSAs are growing in popularity. Not only can an HSA be a savvy way to save for healthcare but it can also be a strong retirement-savings option. And with retirement and healthcare being two major life expenses, employing an HSA can also bolster your financial plan, protecting you from major out-of-pocket expenses.

Understanding the Differences Between HSAs and FSAs

HSAs are pretty great, but they’re also often easy to misunderstand and underutilize. Too often, people view and use them as their distant cousin, the flexible spending arrangement (FSA) for healthcare expenses. While HSAs and FSAs are both tax-advantaged accounts designed to help you save and spend for medical expenses, key differences impact their long-term value and usage.

Eligibility

You now know that, to open an HSA, you must be enrolled in a qualifying high-deductible health plan (HDHP). FSAs, on the other hand, are available to anyone with an employer-sponsored healthcare plan, regardless of the plan’s deductible (assuming the employer also sponsors the FSA plan).

Pro tip: A common hang-up is that you can only have an HSA if you’re enrolled in an HDHP. While this is true, many people equate “high-deductible” with “bad” or “risky,” which is not necessarily the case. In fact, HDHPs can be a smart choice for those who are generally healthy and do not require frequent medical care.  Even for high-utilization situations, HDHPs can still provide robust and more affordable coverage in comparison to things like copays and out-of-pocket maximums of non-HDHP alternatives. HDHPs come with lower premiums, allowing you to save money on a monthly basis. Of course, when you pair an HDHP with an HSA, you can unlock numerous financial advantages.

Carryover

Unused HSA funds carry over from year to year, allowing you to build up your savings over time. In contrast, FSAs operate on a “use it or lose it” basis, meaning you must spend your entire FSA balance each year … or forfeit the unspent funds.

Ownership and Portability

Individuals own HSAs, meaning you can take your HSA with you if you change jobs or retire. However, employers own FSAs, so you generally can’t transfer your FSA balance if you change employers.

Investment Options

If you have an HSA, you can often invest your funds in a variety of assets, such as stocks, bonds, or mutual funds. This allows your balance to grow tax-free over time. FSAs, on the other hand, do not offer investment options.

Is an HSA Right for You?

As great as I think HSAs are, they’re not for everyone. If you’re considering an HSA, the first question you can ask yourself is, “Would a high-deductible health care plan be the right insurance option for my needs?” Then, consider some of the potential downsides to HSAs:

• If you withdraw money from your HSA for a non-qualified expense, the penalty is a stiff 20%.
• You must be able to substantiate qualified medical expenses to prove that you used your HSA withdrawals properly.
• Some HSAs charge account fees or transaction fees, which can eat away at your savings.
• If you aren’t already contributing enough to receive the full employer match in your 401(k) or similar retirement account, funding an HSA might not be the best way to meet your more pressing financial goals.

With the right balance of insurance coverage and savings goals, an HSA could be an effective tool in your financial toolbox. It’s worth it to consider the options. And don’t skip over HSA-eligible high-deductible health insurance simply because of the high deductible part.

Tips for Maximizing the Value and Use of Your HSA

Knowing what an HSA is, the benefits one can offer, and how to use it, how can you make the most of it?

1. Prioritize HSA contributions for tax benefits.

To maximize the long-term value of your HSA, make it a priority to contribute the maximum amount allowed each year. By contributing the maximum, you can take full advantage of tax-deductible deposits, tax-free growth, and tax-free withdrawals for qualified medical expenses.

2. Invest your HSA funds.

You may wonder, “Should I invest my HSA funds?” Absolutely! Investing your HSA funds in a diversified portfolio can help you grow your account tax-free over time. By treating your HSA as a retirement account or long-term investment account, you can potentially build a significant nest egg for future medical expenses or retirement.

Employer’s HSA bank doesn’t allow you to invest? You have other options! You can continue to contribute to your employer-sponsored HSA through payroll to avoid paying Medicare and Social Security taxes on these dollars. Once they’re available in your account, simply transfer them to an HSA account at a different custodian that allows you to invest HSA funds. This is especially great if your employer contributes to your HSA so you don’t miss out on “free HSA money”! Just keep in mind that you can have multiple HSAs but still have to stay at or under the maximum annual limit for all of your contributions combined.

3. Delay reimbursements.

Instead of using your HSA to cover immediate medical expenses, consider paying for them out of pocket and saving your receipts. This allows your HSA funds to continue growing tax-free while still giving you the option to reimburse yourself for past expenses at any time in the future.

4. Use your HSA for retirement planning.

Once you become eligible for Medicare (typically at age 65), you can use your HSA for non-medical expenses without incurring a penalty (though you’ll still pay taxes on non-medical withdrawals). This makes your HSA an effective tool for retirement planning, allowing you to save for future expenses and supplement your retirement income.

5. Optimize your HSA investment strategy.

As with any investment account, it’s important to periodically review and adjust your HSA investment strategy to ensure it aligns with your risk tolerance and financial goals. By staying proactive and optimizing your HSA investment strategy, you can help maximize the growth of your funds over time.

6. Utilize the one-time funding rollover opportunity from an IRA.

Another way to maximize the value of your HSA is to take advantage of the one-time funding rollover opportunity from an individual retirement arrangement (IRA) to your HSA. This single-use rollover allows you to transfer funds from your IRA to your HSA tax-free, up to the annual HSA contribution limit. This one-time rollover can help you boost your HSA balance and increase the funds available for tax-free growth and qualified medical expenses. Keep in mind that you can only make use of this rollover once in your lifetime, so it’s essential to carefully consider the timing and the amount you wish to transfer.

7. Plan for your or your family’s future.

You can also use your HSA to cover qualified medical expenses for your spouse and dependents — even if they’re not covered by your HDHP. This makes the HSA a powerful tool for protecting your family’s financial well-being. As you plan for your family’s future, consider incorporating your HSA into your overall financial strategy to ensure their medical needs are covered.

Take Action

Don’t let misconceptions about HDHPs or the limitations of FSAs hold you back from making the most of this powerful financial tool. Instead, as the name implies, embrace the saving opportunity an HSA represents.

By understanding the key advantages of an HSA and not using it like an FSA, you can unlock its full potential as a tax-efficient savings vehicle. With proper planning and management, your HSA can become an integral part of your financial plan, helping you save for medical expenses, retirement, and more — completely tax-free!

You may even find that you love HSAs, too.