Investing

Your Complete Guide to Understanding an HSA for Health, Retirement, and More

Javier Simon

Published: June 6, 2024 9:36 am

A Health savings account (HSA) can help you save for medical expenses while providing you with major tax benefits.

In fact, HSAs stand out for their triple-tax advantage.

• Contributions are tax-deductible
• Earnings from interest, capital gains, and dividends are tax-free
• Withdrawals are tax-free if used to cover qualified medical expenses

Additionally, HSAs can be used as retirement savings tools.

How to Use an HSA in Retirement to Make the Most of It

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After you reach the age of 65, you can withdraw HSA funds for any reason without penalty. But you’d still owe income tax on the distribution if it’s not for a qualified healthcare expense.

Nonetheless, you’d avoid the 20% penalty for a non-qualified withdrawal once you turn 65. So you can take out excess funds to take a vacation, buy a boat, help your grandkids with the downpayment on their first house, and more without penalty.

This benefit could make an HSA a useful addition to your individual retirement account (IRA), Roth IRA, or 401(k).

For more details, check out our comprehensive guide on How You Can Use An HSA For Retirement.

Turbocharged Health and Wealth: Leverage HSAs in 2024 as Contribution Ceiling Lifts

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Each year, the IRS sets contribution limits for HSAs. For 2024, the HSA contribution limits increased nearly 7% to $4,150 for individual coverage and $8,300 for family coverage.

And those age 55 and older can make additional catch-up contributions of $1,000.

And for 2025, these limits will increase to $4,300 for individual health coverage and $8,550 for family coverage.

These are HSA-Eligible Expenses This Year

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One key point to note is that HSA withdrawals are tax-free only if the funds are used to cover qualified medical expenses as defined by the IRS in Publication 502.

But luckily, qualified or HSA-eligible expenses include a wide range of medical, dental, vision, and prescription costs. Here are some examples.

Medical

• Ambulance services
• Alcoholism treatment
• Allergy and sinus medicine
• Chiropractors
• Co-insurance (medical, dental or vision)
• Co-payments
• Deductibles
• Drug addiction treatment
• Flu shots
• Guide dogs or other service animals
• Prescription drugs
• Sleep aids and sedatives

Dental

• Braces
• Dentures
• Exams
• Extractions
• Fillings
• Teeth cleaning
• X-rays

Vision

• Contact lenses
• Examinations and glasses
• Laser eye surgery
• X-rays

HSA Rollovers Explained: How They Work

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An HSA is yours to keep. And if you opened your HSA through your employer, you get to keep your HSA funds even if you lose your job or go work for a different company. In fact, you can rollover your HSA to another account with a different provider.

This may also be a good option if you opened your HSA through a financial institution and found one that offers lower fees, better investment options, or more features that meet your needs.

The best way to initiate an HSA rollover is through a Trustee-to-trustee direct transfer. This simply means your current HSA provider directly transfers your HSA funds to your new HSA account.

In some instances, your HSA provider would send you a check or electronic transfer for the balance when you request a rollover. In this case, you have 60 days to deposit the check into your new HSA account. Otherwise, the check counts as a taxable withdrawal and you’d owe income taxes on the distribution in addition to a 20% tax penalty if you’re under the age of 65.

Fidelity HSA Review: Is It Any Good?

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Various financial institutions such as brokerages like Fidelity Investments allow you to open HSAs.

The Fidelity HSA comes with no annual maintenance fees, and you can open one with no minimum deposit. The self-directed Fidelity HSA allows you to invest in a variety of investments including the following.

• Stocks (Including fractional shares)
• Bonds
• Exchange-traded funds (ETFs)
• Mutual funds

Moreover, you can also open an HSA through the Fidelity GO robo-advisor platform. After you answer a few questions about your financial situation and goals, the robo-advisor recommends a diversified portfolio. This professionally managed portfolio is automatically rebalanced to stay in line with your goals, making it a considerable option for hands-off investors. Additionally, the Fidelity GO platform charges no annual advisory fee for accounts with balances of less than $25,000. After that, it’s a competitive 0.35% annual fee.

Schwab HSA: Is It Worth Doing?

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To open a Schwab HSA or Schwab Health Savings Brokerage Account (HSBA), you must currently have an HSA with a provider that allows a brokerage option.

That’s because the Schwab HSBA is a type of brokerage account that you operate within your existing HSA.

The Schwab HSBA would give you access to a variety of securities like stocks, bonds, mutual funds and ETFs. And you can manage your portfolio using Schwab’s free research tools like stock screeners, watchlists, and expert-selected lists of ETFs.

Schwab doesn’t charge a maintenance fee on its HSBA, but your current HSA provider might.

How Does a HSA Work, Actually?

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To be eligible for an HSA, you need to pair it with a high-deductible health plan (HDHP). For 2024, these are plans with a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage.

If eligible, you can open an HSA through some employers or financial institutions such as banks and brokerage firms. For more details, explore our detailed piece on how HSAs work.

HSA vs FSA: What Are The Differences?

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Health savings accounts (HSAs) and flexible spending accounts (FSAs) both help you save money to cover qualified medical expenses tax-free.

But there are a few key differences to keep in mind. As long as you have an eligible HDHP, you can open an HSA through an employer that offers one or through a financial services company. But you can generally get an FSA only through employers that offer these as part of their benefits packages.

If you have access to both, here’s a quick glimpse at how they differ.

For more information, check out our in-depth report on HSA vs FSA: What Are The Differences?

HSA vs HRA: What Are The Differences?

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HSAs are savings accounts that you and your employer can contribute to up to contribution limits in order to fund qualified healthcare costs.

Health reimbursement arrangements (HRAs), on the other hand, are arrangements between you and your employer that allow your company to reimburse you tax-free for qualified healthcare expenses you already paid for on your own. And unlike with HSAs, your employer owns your HRA and only your employer can contribute.

If you have access to both, here is a quick comparison.

HSA vs PPO

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While an HSA is a savings account designed to cover healthcare expenses, a preferred provider organization (PPO) is a health insurance plan that gives you access to a network of doctors, specialists, and other healthcare providers.

In order to have an HSA, you’d need to pair it with an HDHP. Most PPO’s aren’t HDHPs because of their low deductibles. So the question may come down to whether you want an HDHP with an HSA or a stand-alone PPO. Here’s a quick glance at their features.

Overall, an HDHP may make more sense if you don’t visit the doctor often and you don’t expect frequent medical attention. This could lower your monthly payments for health insurance. But if you have a chronic illness and visit the doctor often, you may want to opt for a PPO with a low deductible. This would require you to make smaller out-of-pocket payments before your insurance kicks in.

How Do Distributions Work From An HSA?

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An HSA distribution is a withdrawal of funds from your HSA account. These often can be made in the form of HSA debit card transactions, checks, or money sent directly from your account to a provider via electronic or digital means. Distributions or HSA withdrawals are tax-free as long as you use it to cover qualified medical expenses as defined by the IRS.

However, you need to report all distributions to the IRS. Your HSA provider would generally send you an IRS Form 1099-SA that contains details about these distributions. You’d then use that information to fill out IRS Form 8889 and include it with your Form 1040 when you file your taxes.

When To Max Out Your HSA, and When To Skip It

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Maxing out your HSA can help you make the most out of its tax benefits and prepare you for costly medical bills down the road, especially in retirement.

According to the latest Fidelity Retiree Health Care Cost Estimate, an average retired couple of ages 65 in 2023 needed about $315,000 after-tax saved to cover health care expenses in retirement. And an average individual needed $157,500.

But focusing just on maxing out your HSA isn’t always the best option, especially if you have financial burdens like high-interest credit card debt. If your HSA money is an interest-bearing account, you may get anywhere from around 0.30% to 1% annual return. But what if it’s invested in a fund that tracks the S&P 500? The historic average annual return of the S&P 500 has been around 10%. But neither is higher than the average credit card interest rate of about 25%.

So sometimes, it may make more sense to contribute modestly toward your HSA.

HSA And Spouses, Can You Have Two Accounts?

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If you and your spouse are covered by the same HSA-eligible HDHP and meet all other IRS requirements for establishing an HSA, you can open an HSA under one partner’s name and contribute up to the family coverage limit. For 2024, that’s $8,300.

However, you and your spouse can both set up individual HSAs and split the family coverage contribution maximum across both accounts as you both see fit.

And if you’re single, you can have multiple HSAs. There’s no limit to how many HSAs you can have in your name. But the key point to keep in mind is that your individual HSA contribution limit applies to your HSAs combined. This means you can’t contribute more than $4,150 in 2024 ($5,150 if age 55 or older) across all your HSAs.

Why we covered this

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HSAs could be essential tools in helping you save for unexpected medical bills and they may also serve as retirement savings vehicles. Its triple tax advantage makes an HSA one of the most tax-advantaged accounts of its kind. But it’s important to know how HSAs work and other key details in order to make the most of HSA benefits and avoid penalties.