Is HSA the best way to pay for your healthcare?

What’s HSA?

HSA stands for Health Savings Account. An HSA is a tax-free account designed to help people save on health care costs. Contributions are tax-free. There are limits on the amount that can be deposited in an HSA each year. These limits are typically much lower than the maximum contribution limit for other savings accounts such as 401K.

The basic idea is to get an insurance plan that requires a less than usual coverage – may be only catastrophic event coverage with a higher deductible. These plans are known as High Deductible Health Plans or HDHP. As a result people subscribing to such a plan do pay higher money out of pocket every year.  Not only is the deductible higher, but also each doctor’s visit costs more in most cases.  To compensate for the cost, the government will let you contribute a certain amount every year to an IRA like account and wave the tax on it. In addition to that the account can be a brokerage account. You will be able to invest the money in stocks and bonds just like your 401K or IRA. As that money grows, you can get the out of pocket expenses reimbursed from this account as long as you have the proper documentation. 

The biggest benefit of HSA – The Triple Tax Advantage

HSAs provide triple tax advantage over other healthcare accounts:

  • No Income Tax on Contributions: Contributions to an HSA are not subject to income tax, regardless of the account holder’s filing status. This allows you to reduce your tax liability for the year you contribute to a HSA.
  • No Penalty for Early Withdrawal: There is no penalty for withdrawing funds from an HSA before you reach age 59 if used for qualified medical expenses.
  • Tax-Free Growth: Your earnings – or the growth of the money kept in a  HSA is also tax exempt at the time of withdrawal as long as you use it for qualified medical expenses. 

Other Benefits of HSA

Like most people, you probably don’t consider your health plan a savings account. HSA essentially gives you an opportunity to convert your health plan into an investment account. Here are some other benefits of HSA accounts:

  1. HSA account holders can use the money they save to cover out-of-pocket medical expenses without owing taxes on the entire amount.
  2. There is no time limit for getting your healthcare expense reimbursed from a HSA account. You can spend the money right now and get it reimbursed 10 years later as long as you have proper documentation.
  3. Money in an HSA is exempt from state and local taxes except a very few states such as California and New Jersey, making it an excellent choice for people who live in states with high income tax rates.
  4. You can use your HSA to cover the cost of long-term care services and hospice care.
  5. You decide how and when to spend or save HSA money. It is totally yours forever; it will not expire, and you may have it with you during the job change or have a change of health care coverage.
  6. If you have an HSA, you can use it to pay for qualified medical expenses for yourself and your spouse or dependent children. 

When Can You Withdraw Money From a HSA?

Funds can be withdrawn anytime, without penalty, and even used for expenses like long-distance travel for medical purposes. However, suppose an HSA withdrawal is used for anything other than a qualified medical expense. In that case, Tax  will be applied on them as an ordinary income, and the IRS will impose a 20% penalty. So it’s essential to be careful when using HSA funds.

You are allowed to withdraw HSA funds for non-medical reasons after the age of 65. But at that time, the withdrawn money will be taxed at the normal prevailing income tax rate. Thus at that point it becomes like an IRA. One of the advantages in the triple tax advantage mentioned above goes away if you plan to use it for non medical purposes after the age of 65. The key is to save all the receipts and properly document the health care expenses so that you can withdraw money from your HSA without tax and without penalty. Here are some ways to track your HSA receipts.

Who Can Use a Health Savings Account?

There are a few people who can use an HSA. 

  1. Employees with qualifying health insurance plans (HDHP)  through their job
  2. Individuals can use HSAs if they are uninsured or have low-cost coverage that doesn’t offer coverage for essential health benefits.
  3. The health saving account is available to eligible individuals for Medicare or Medicaid.


A Health Savings Account (HSA) is a great way to save for health care expenses. The money you put into an HSA is not subject to federal income tax, so keeping it for long-term healthcare needs can be a great way to save. It is an account where you can deposit money and use it to pay for eligible healthcare expenses and that too tax-free! Please consult with your financial advisor before taking a step to set up a HSA. Also, please note that HDHP insurance plan is required to set up a HSA

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