How to be HSA Savvy

Image by Rudy and Peter Skitterians from Pixabay

They may be only one letter apart, but an HSA (health savings account) and FSA (flexible spending account) are different animals that need different care—and an HSA offers so much more than most people realize.

People with high-deductible health insurance plans may qualify for a health savings account, which allows you to put pre-tax income into a savings account to be put toward medical care costs down the road. Unlike an FSA, there’s no deadline for using the money—you could save it for years, even past retirement—and it’s not tied to a specific employer. You take it with you no matter where you work. And as long as the expense is a qualifying medical cost, you get to choose when it gets spent.

  • The list of what qualifies is long, including: prescriptions, eyeglasses, crutches, counseling, and regular trips to the doctor or dentist, as well as things like travel costs for treatment and braces for the kids. The full list of what’s included can be found at: irs.gov/forms-pubs/about-publication-502
  • This is money that can only be spent on healthcare costs, so it’s not a replacement for other retirement investments—but expenses on those qualifying medical costs are withdrawn with no taxes. Not only that, if you still have money in your HSA after age 65, but the tax rate on non-medical withdrawals also drops to whatever your current tax rate is—effectively turning the HSA into an IRA at that point. Withdrawing money from an HSA for non-qualified expenses before age 65 is costly (there’s a tax on the withdrawal plus a penalty), however, so try to avoid doing so.
  • Talk with your employer about signing up for an HSA if you haven’t already—you can often contribute monthly through payroll deductions—and try to contribute the maximum amount each year. Check-in with your tax preparer to find out if you can add anything to your HSA before you file your taxes.