A Health Savings Account (HSA) is a type of personal savings account that allows you to save tax-free money and withdraw tax-free money to cover qualified medical expenses. You can open an HSA at most banks. Some financial institutions specialize in HSA administration and related services (e.g. Health Equity and Lively).
Any money you contribute to an HSA accumulates if you don’t spend it, and you can access it any time. However, you can’t contribute to an HSA in a given tax year unless you or a family member was covered by an HSA-eligible health insurance plan during that tax year.
The primary reason most people use HSAs is to take advantage of the tax savings. HSAs have triple tax advantages:
- Any money you contribute to an HSA is excludable from your federal income taxes.
- Any gains you earn on your HSA contributions are excludable from your federal income taxes.
- Any money you withdraw for qualified medical expenses is excludable from your federal income taxes.
The IRS defines what’s eligible as a qualified medical expense in IRS Publication 502. The list includes most medical, dental, and vision expenses.
There are annual limits on how much you can contribute to an HSA each year. These limits are set by the IRS and adjusted each year to account for inflation. For the 2022 tax year, the HSA contribution limits are $3,650 for individuals and $7,300 for families. Once you hit the age of 55, the IRS allows you to make additional “catch-up contributions”. For the 2022 tax year, the HSA catch-up contribution limit is $1,000 per individual.
If you withdraw HSA funds for nonqualified expenses before you turn 65, you are required to pay taxes on the withdrawal plus a 20 percent early-withdrawal penalty. Once you turn 65, the early-withdrawal penalty no longer applies, but you still have to pay taxes on nonqualified withdrawals.