How to Use a Health Savings Account: Understanding How HSA Accounts Work

With healthcare costs on the rise in the U.S., you may want to learn more about how to use a Health Savings Account.

The Health Savings Account, also known as an HSA, can help you cover healthcare expenses, save money on taxes, and even save money for retirement. To get the most from the account, however, you really need to know the ins and outs.

In this article, we’ll share some of the best ways to use an HSA, and also touch on some of the limitations.

Table of Contents
  1. What Is an HSA?
  2. HSA Advantages
    1. Use an HSA to Lower Your Taxable Income
    2. Use Your HSA as a Tax Free Investment Account
    3. Use Your HSA for Tax Free Withdrawals
    4. Unlimited Rollover of Funds
    5. Use Your HSA to Pad Your Retirement Savings Plan
    6. Funds are Transferable If You Change Employers
  3. HSA Disadvantages
    1. Only Those Who Have HDHPs Can Participate
    2. Tax Penalties for Unqualified Withdrawals
    3. Some Institutions Charge Fees to Manage
  4. HSA FAQs
  5. Final Thoughts

What Is an HSA?

A Health Savings Account is a tax-advantaged health cost savings plan used with your employer’s high deductible health plan.

You are eligible to open an HSA only if you (or your spouse) have a high deductible health plan through your employer. Note that you can’t open an HSA if you are covered through another type of insurance plan that is not a high deductible plan. 

For instance, you can’t open an HSA if a spouse’s non-HDHP insurance covers you. 

You get to choose the amount of money you want to contribute to your HSA (up to the annual limit), with the money deducted from your pre-tax paycheck. The annual contribution limit for HSAs can change each year. As of 2022, the contribution limit is $3,650 for individuals and $7,300 for families.

There is a $1,000 catch-up contribution allowed for persons age 55 and older. The HSA is not means-tested. In other words, you don’t have to fall under a certain income category to be eligible for an HSA.

For a better understanding of how an HSA can work for you, let’s take a closer look at some of the key advantages.

HSA Advantages

Use an HSA to Lower Your Taxable Income

All contributions to your HSA are tax-deductible up to the annual contribution limit. 

As a result, you may be able to use your HSA to lower your taxable income by as much as $9,200 if both you and your spouse have HDHPs and are over age 55.

Note that if you contribute more than the annual limit allows, the IRS will require you to pay taxes on the overage amount along with a 6% excise tax. 

Use Your HSA as a Tax Free Investment Account

In addition to tax-deductible contributions, your earnings will grow tax-free. 

No matter how much you earn on your investment, you’ll never be taxed on the earnings as long as you use the money for qualified medical expenses. 

And you can invest your HSA money in any number of investment vehicles, from a basic savings account to an investment account with stock, bond, and mutual fund shares.

Check out the best HSA account options to maximize earnings and minimize fees. 

Use Your HSA for Tax Free Withdrawals

The third tax advantage of the Health Savings Account comes in the form of tax-free withdrawals.

The IRS will never tax you on the money you withdraw from your HSA as long you use the funds for qualifying medical expenses. 

This IRS web page has more information about what counts as qualifying medical expenses. 

Unlimited Rollover of Funds

With HSAs, there is no limit to the dollar amount of contributions you can roll over to use in subsequent years. In theory, you could roll over your entire annual contribution limit every single year if you wanted to.  

This rule is highly beneficial to taxpayers, especially those who have little to no medical expenses. We’ll explain why in the next section.

Use Your HSA to Pad Your Retirement Savings Plan

An HSA can be a great addition to your retirement savings plan. 

This is because you can withdraw the funds for any reason after age 65 and avoid the IRS penalty those under 65 will face for unqualified withdrawals.

If you’re under 65 and withdraw HSA funds for reasons other than qualified medical expenses, you’ll be subject to a tax penalty from the IRS.

However, if you are 65 or older and withdraw HSA funds for reasons other than qualifying medical expenses, you are exempt from the tax penalty.

However, keep in mind that you will be taxed on the money as it will be considered income. 

Funds are Transferable If You Change Employers

If you ever change employers, you can take your HSA funds with you and continue to use them in a qualified manner. 

However, you can only contribute additional funds to your HSA if you sign up for a high deductible health plan with your new employer. 

Be sure to check fees with your new employer’s HSA plan to see if you should keep your old plan or roll the funds over to your new employer’s HSA plan. 

Next, talk about some of the disadvantages of the HSA. 

HSA Disadvantages

Only Those Who Have HDHPs Can Participate

As mentioned earlier, you can only open an HSA if you participate in a high deductible health plan through your employer. 

High deductible health plans are named as such and have a minimum annual deductible that varies by year.

For 2022, the minimum deductible for HDHPs is $1,400 for individuals and $2,800 for families. 

Tax Penalties for Unqualified Withdrawals

As mentioned earlier, the IRS does charge a tax penalty if you withdraw and use your HSA funds for non-qualifying expenses. 

That penalty currently stands at 20%. In addition, the IRS will count the non-qualified withdrawal as taxable income. 

Remember, however, that if you’re 65 or older and make a non-qualifying withdrawal from your HSA, the IRD won’t charge the 20% penalty.  

Some Institutions Charge Fees to Manage

It’s essential to be aware that some institutions will charge you fees to manage your HSA account through them. To save money, look for HSA managers that charge low fees or no fees, such as Lively. 

Next, let’s answer some common HSA FAQs.  


Can I have more than one HSA?

Yes, you can have as many HSA accounts as you’d like! Just be aware of the fees charged on each account. Also, make sure you’re staying within the annual contribution limits for HSAs no matter how many HSA accounts you have. 

What happens if I drop my HDHP?

If you drop your HDHP, you can still keep your HSA and use it for qualifying expenses. However, you can no longer make contributions to your HSA.

Can another person contribute to my HSA?

Anyone can contribute to your HSA! In addition, you can contribute to anyone else’s HSA. 
The tax deduction, however, belongs to the HSA owner, regardless of who contributes.

Final Thoughts

Health Savings Accounts have many valuable advantages for account owners, and the triple tax advantage (deductible contributions, tax-free growth, tax-free qualified withdrawals) make it a great way to help you grow your wealth.

Just keep in mind the disadvantages of the HSA as you plan your contributions and management of your account.

And don’t forget to pay close attention to fees! Fees are the bane of a good investment account’s existence! 

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About Laurie Blank

Laurie Blank is a blogger, freelance writer, and mother of four. She’s psyched about teaching others how to manage their money in a way that aligns with their values and has been quoted in Bankrate.

She's a licensed Realtor with Edina Realty in Minneapolis, Minnesota (also licensed in Wisconsin too) and has been freelance writing for over six years.

She shares powerful insights on her blog, Great Passive Income Ideas, that will show you how you can create passive income sources of your own.

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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