How to Start a Health Savings Account

A health care patient pays for medical services.
•••

Luis Alvarez / Getty Images

A Health Savings Account (HSA) provides a way to save money for health costs like copays, deductibles, prescription medications, over-the-counter items, and more. Here's what you need to know to choose a good HSA and where to get one.

Key Takeaways

  • You must be enrolled in a qualified high deductible health plan to open an HSA.
  • You can set up an HSA with many types of financial institutions, including banks, credit unions, brokers, and insurance companies.
  • Before opening an account with an institution, consider factors such as administrative fees, investment options, and what the withdrawal process looks like.

What Is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a special type of tax-free savings account that you can use to save money for medical expenses when you are enrolled in a qualified high deductible health care plan. Health Savings Accounts have many benefits and can double as a long-term savings tool if you do not use the money in the plan for medical expenses.

Here's how it works. With a high deductible health insurance plan, you will have to pay for any medical expenses up to your deductible amount before your insurance coverage kicks in. Your HSA will help you pay for the medical expenses that the insurance policy does not cover. But that's not all it can do for you.

What Are the Advantages of an HSA?

An HSA can help you pay for your medical needs in the short term, and it can help you reach your savings goals in the long term. Consider these five advantages of an HSA.

Money Goes Into Your HSA Before It's Taxed

As with other pre-tax savings schemes like IRAs and 401(k) plans, this reduces your taxable income. For the calendar year 2021, individuals can direct $3,600 of their pre-tax income into an HSA. For families, the limit is $7,200. In 2022, these limits increase to $3,650 and $7,300, respectively.

Interest Earnings Are Tax-Free

Any earnings from investments in the account are likewise tax-free.

Unused Funds Carry Over to the Following Year

Funds in your HSA are not "use it or lose it." Instead, these accounts can grow to thousands of dollars through contributions and investments (provided you have not tapped the funds for medical expenses).

Withdrawals for Medical Expenses Are Tax-Free

If you do need to withdraw funds from your HSA to cover qualified medical expenses, you can do so without incurring tax. However, withdrawals for non-medical expenses are subject to income tax and a tax penalty (20% of the amount withdrawn).

Non-Medical Withdrawals Made at age 65 Aren't Penalized

If you are fortunate enough to reach age 65 with a healthy HSA, you can access those funds for any use without a tax penalty. However, to be completely tax-free, those withdrawals must be for qualified medical expenses. Non-medical distributions are taxed as regular income.

Tip

Learn more about how an HSA measures up to a FSA

Tips for Choosing a Good HSA

Because HSA accounts are not only used to reimburse medical expenses but can also act as savings vessels for your future if you do not use them, it is important to think of this as a type of retirement investment account.

  • Beware of high administrative charges or fees. 
  • Ask if the administrative fee is waived when you have a specific minimum balance. 
  • Ask if you will be able to manage your account online.
  • Ask if you will have a debit card to access your funds.
  • Find out what the process is withdrawals or reimbursements.
  • Finally, ask about investment options for your account.

A Note About Fees

Although you do not need to have a minimum balance to open and maintain an HSA, some administrators (the bank, credit union, or insurance company that manages your HSA) may waive fees once you have reached the minimum balance. Obviously, a plan with a lower minimum balance may save you a lot of money in fees when you are just starting out with your HSA.

Where to Set Up a HSA

Starting a Health Savings Account is not difficult. You can set up your account with:

  • Banks
  • Brokers and financial advisors
  • Credit Unions
  • Insurance Companies

Banks, credit unions, and insurance companies will each have their own specified plans to offer you. Brokers will have several options. Ask your bank about its HSA plans, and then speak to a broker who can review additional options. In the end, doing a little bit of research may help you earn more money in interest, spend less in fees, and give you more control of your account.

What Are the HSA Contribution Limits?

The HSA contribution limit in 2021 for those with an individual health plan is $3,600. For those with a family plan, the 2021 HSA limit is $7,200. In 2022, these limits increase to $3,650 for individuals and $7,300 for families.

If you're age 55 or older, you can make a catch-up contribution of $1,000, over and above the normal contribution limits. And unlike an IRA contribution, you do not need earned income to be eligible for an HSA contribution.

Is a High Deductible Health Plan or HSA a Good Idea?

According to Caitlin Donovan, Director of Outreach and Public Affairs at National Patient Advocate Foundation, HSAs are a good idea if you have access to one. Donovan told The Balance that it's wise to continue using it. With the future of health care plans a little uncertain, one thing that has favorable futures is the potential expanded use of HSAs.