Understanding Health Savings Accounts: Planning for Medical Costs Today and Tomorrow

Healthcare expenses are a reality at every stage of life, and for many people, managing those costs requires planning ahead. Since Health Savings Accounts (HSAs) became available in 2003, they have offered a way for individuals and families to set aside money specifically for medical needs—while also providing meaningful tax advantages.

For those enrolled in certain health plans, an HSA can support both current healthcare spending and longer-term financial goals.

How a Health Savings Account Works

A Health Savings Account is a personal savings account designed for healthcare expenses. It is available only to individuals enrolled in a qualified high-deductible health plan (HDHP). These plans typically have lower monthly premiums but require you to pay more out of pocket before insurance begins covering costs.

An HSA helps offset that higher deductible by allowing you to save money specifically for eligible medical expenses, either for immediate use or for future needs.

Why HSAs Offer Unique Tax Benefits

One of the most distinctive features of an HSA is how it is taxed. Contributions to the account are tax-deductible, and when made through an employer, they are often taken directly from paychecks using pre-tax dollars.

Money withdrawn to pay for qualified medical expenses is not taxed, and any interest earned or investment growth inside the account is also tax-free. Together, these features create what is often referred to as a “triple tax advantage.”

An Account You Keep—Regardless of Job or Plan Changes

Unlike some workplace benefits, an HSA is owned by the individual, not the employer. Funds left in the account roll over automatically from year to year. The account remains yours even if you change jobs, switch health plans, or retire.

This flexibility allows HSAs to be used for both short-term healthcare costs and long-term planning, including medical expenses later in life.

Who Can Open and Contribute to an HSA

Not everyone is eligible for an HSA. To qualify, you must be covered by a qualified high-deductible health plan and have no other health coverage, aside from limited exceptions such as dental or vision insurance.

You also cannot be enrolled in Medicare or TRICARE, and you cannot be claimed as a dependent on someone else’s tax return. All eligibility requirements must be met in order to contribute.

Advantages to Consider

HSAs offer several potential benefits. Contributions, earnings, and qualified withdrawals are all tax-free at the federal level. Because balances roll over indefinitely, HSAs can also help prepare for healthcare costs during retirement.

Some employers contribute to employees’ HSAs, helping balances grow faster. In addition, funds are typically easy to access through debit cards or checks, and the account remains portable even when employment changes.

Important Tradeoffs and Limitations

HSAs also come with considerations. Enrollment requires a high-deductible health plan, which may result in higher out-of-pocket costs. Without adequate emergency savings, unexpected non-medical expenses could strain finances and limit the ability to contribute.

Some HSA providers charge fees, and withdrawing funds for non-medical purposes before age 65 can trigger income taxes and a penalty of up to 20%.

What Expenses Can HSA Funds Cover?

The IRS determines which expenses qualify each year. In general, medically necessary expenses are eligible, while elective costs are not.

Qualified expenses commonly include doctor visits, prescriptions, dental and vision care, physical therapy, preventive services, mental health treatment, hearing aids, and non-cosmetic surgeries.

Expenses such as cosmetic procedures, most over-the-counter medications without a prescription, vitamins, supplements, and vacations—even if intended for mental health—do not qualify. Reviewing current IRS guidance can help avoid mistakes.

Strategies to Use an HSA Effectively

Many people choose to contribute as much as allowed under annual IRS limits, which vary based on age and whether coverage is individual or family. Saving enough to cover your deductible allows you to pay those costs with tax-free dollars.

Others aim to contribute enough to cover expected annual medical expenses while allowing unused funds to remain invested and grow. After age 65, HSA funds can be withdrawn for non-medical expenses without a penalty, though income tax may apply, making the account a possible supplement to retirement savings.

Using Your HSA in Practice

Contributions can be made through payroll deductions or directly to the account, with tax deductions claimed later if needed. Funds are typically accessed through a linked debit card or checks and can be used to pay for qualified expenses such as copays, deductibles, and prescriptions.

Any balance not used remains in the account automatically, continuing to roll over year after year.

Key Points to Remember

HSAs are available only to individuals enrolled in qualified high-deductible health plans. Their combination of tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses can provide meaningful savings. However, using funds for non-qualified expenses may result in taxes and penalties.

Moving Forward With an HSA

Talking with an employer or tax professional can help clarify available options. Reviewing your healthcare expenses can identify which costs are eligible, and setting a contribution strategy based on your budget and IRS limits can keep the account aligned with your goals.

When used thoughtfully, an HSA can support healthcare needs today while also contributing to longer-term financial planning.