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All About Health Savings Accounts (HSAs)

Individuals 09.26.2023 5 MIN

Not sure if a health savings account (HSA) is right for you?1 An HSA is a powerful savings tool and can be used later in life for both health—and non-health-related—expenses. Even if you leave an employer or retire, your account balance comes with you.   


What is an HSA?

In simple terms, an HSA is an account for saving pre-tax money to help pay for qualified medical expenses, such as prescriptions and doctor visits. You can also invest the money you put into your HSA and watch your funds grow tax-free! To fund an HSA, you need to meet these requirements:

  1. Your health insurance plan must be considered a High Deductible Health Plan (HDHP). Your employer or insurance provider will be able to tell you if you have an HDHP
  2. You have no other health coverage except what is permitted under IRS rules
  3. You’re not covered by Medicare
  4. You’re not listed as a dependent on some else’s tax return


Key characteristics of an HSA

HSAs have a triple-tax advantage, which makes them a great option for potential long-term savings. Employee contributions made to this account are pre-tax, so they decrease your taxable income. Any contributions you or your employer make, plus any investment gains those contributions earn, are generally tax-free if they are used to pay for qualifying medical expenses.

Once you turn 65, you can use your HSA funds to cover any expenses. Your distributions will be subject to ordinary income tax, but you won’t face any tax penalties.

Additional features:

  • You don’t pay federal taxes on money in your HSA if used for qualified medical expenses, though you may pay state income taxes (depending on where you live)
  • There are limits to how much you (and your employer if they contribute) can deposit into your HSA each year. We’ll cover these limits in the next section
  • The money in an HSA doesn’t expire, and goes with you if you leave your current employer


Contribution limits

The IRS sets an annual limit on how much can be contributed to an HSA. If you cover only yourself under your HDHP, you are limited to the Single HSA contribution limit, which is $3,850 for 2023. If you cover anyone else under your HDHP (spouse or dependents), you can contribute up to the Family limit of $7,750 for 2023. If you’re age 55 or older, you can make additional catch-up contributions of $1,000.

Please note that the limit includes your own contributions and any contributions that your employer may make. For example, if your employer contributes $500 to your HSA—given the HSA contribution limit in 2023 for an individual is $3,850—then you can contribute up to $3,350. If you’re age 55 or older, you can still contribute an extra $1,000, bringing your contribution limit up to $4,350.

Keep in mind: If you did not have your HSA for the full year, the contribution limit may be prorated. To calculate the prorated contribution amount, first determine the number of full months you’ve been enrolled in your HDHP, then divide that by 12. Multiply that amount by the current year’s contribution limit to determine your prorated contribution limit.

Keep an eye on your total contributions. If you contribute more than the annual limit, you must pay a 6% excise tax on excess contributions.


Who and what is covered?

An HSA can cover yourself, your spouse and any qualifying tax dependents. Even if your spouse and/or dependents are not on your healthcare plan, their medical expenses can still be covered by the funds in your HSA.

HSAs can cover out-of-pocket expenses, such as copays, deductibles and coinsurance for you, your spouse and all dependents you claim on your federal tax return. Dental costs and eye exams, eyeglasses or contact lenses can be covered by your HSA as well. In retirement, HSA money can also be used for Medicare premiums. The IRS keeps a full list of qualified medical expenses, so be sure to refer to it before using your HSA money.

If you’re under age 65, you should only use the funds in your HSA for qualified medical expenses. If you use these funds for a non-qualified expense before then, you pay income taxes on the withdrawal in addition to a 20% tax penalty.


Reimbursement process

You may be provided with a debit card that is linked to your HSA, which you can use at an ATM to withdraw funds.2 Alternatively, you can reimburse yourself for any qualified medical expenses that are incurred after your HSA is open, at any point in time. Although you do not need to present a receipt of expense when withdrawing money from your HSA, it’s critical to save all proof of expenses in the event you were to be audited by the IRS.

Being able to reimburse yourself later in the future allows for a unique planning opportunity. If cash flow allows, consider paying for medical expenses out of pocket and allow the funds in your HSA to remain, growing tax deferred. At any point down the line, you can reimburse yourself for those expenses without incurring any tax at that time.



If you are enrolled in Medicare, you are ineligible to contribute to an HSA, as Medicare isn’t considered an HDHP. However, you can still use the funds in your HSA to cover Medicare premiums (but not Medicare supplements), prescription drugs and any other qualifying medical expenses. Once you reach age 65, you can use your HSA for non-medical expenses and will only be subject to ordinary income tax upon the distributions.


Common Mistakes

  • Although an HSA isn’t a joint account, the 2023 limit of $7,750 is a family limit. If both you and your spouse have an HSA, you together cannot exceed the yearly family limit. It is also important to note that any contribution from an employer will count toward the aggregate limit.
  • If you use funds in your HSA prior to age 65 for a non-qualified medical expense, you will be subject to ordinary income tax and a 20% additional tax on the distribution.
  • You can’t have both a general-purpose FSA and HSA at the same time. However, an HSA can be paired with a limited purpose FSA, which might cover dental and vision, for example.


1 Please consider speaking with a tax advisor before deciding if an HSA is right for you.

2 ATM transaction fees may apply.