A health savings account (HSA) is a special account that allows you to save money for health-related expenses, like an unexpected trip to the emergency room — but it doesn’t just have to be for emergencies.
You can also use the money in your HSA for preventative care, so you can keep yourself healthy and reduce the impact of medical expenses later in life.
Plus, unlike a retirement account, you don’t have to wait to use funds in your HSA.
Erika Taught Me
- An HSA is a type of savings account you can use for qualified medical expenses, including preventative care.
- Preventative care includes things like sunscreen, first aid kits, and breast pumping supplies.
- HSAs can be opened at brokerage firms, allowing you to purchase stocks or bonds and include the HSA as part of your investment portfolio.
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What Can You Use an HSA For?
A health savings account is a tax-free savings account that allows you to save for medical expenses.
HSAs are designed for individuals enrolled in high-deductible health plans. Because high-deductible plans often have higher out-of-pocket expenses, an HSA helps offset those costs.
An HSA can be used for qualified medical expenses, including:
- Deductibles
- Copays
- Coinsurance
- Prescriptions
- Over-the-counter medications
It can also be used for preventative care like:
- Breast pumps and nursing supplies
- Prenatal vitamins
- Fertility testing
- First aid kits
- Wellness checks
- Saunas and cold plunges
- Skincare products like sunscreen
- Prescriptive eyewear
- Athletic tape
- Fitness trackers like FitBits
Certain requirements must be met to use an HSA for preventative care. For example, you may need to be a certain age or be considered high-risk to qualify for some disease screenings or vaccines.
HSA Reimbursement Rules
Depending on your HSA, there are three ways you can access your funds:
- Using a debit card linked to your account
- Paying medical bills from your account
- Submitting a reimbursement request for out-of-pocket expenses
If you have a debit card or shop from an online provider like HSAStore.com, you can withdraw funds directly from your account.
In other cases where you make a purchase out-of-pocket, you’ll need to submit a reimbursement request to the financial institution that services your HSA.
Depending on the purchase, you may need a justification before submitting a reimbursement request. This might entail obtaining a Letter of Medical Necessity from your doctor.
Your HSA and taxes
As you buy health-related supplies throughout the year, take note of those that might qualify for reimbursement. Save the receipts. Because HSAs are tax-benefited accounts, the IRS is always checking for fraud. Keeping good documentation can help if you get audited in the future.
Reimbursement for medical-related expenses is considered a distribution from your account. Because this is from your savings and not earned income, you’ll have to claim it on your taxes. You’ll have to file Form 8889 when you do your taxes.
Be on the lookout for Form 1099-SA from the financial institution servicing your account come tax season.
READ MORE: How Do Taxes Work?
How To Open a Health Savings Account
To open an HSA, you’ll need to be enrolled in a high-deductible health plan. These are plans where the maximum deductible and out-of-pocket expenses are $8,050 for individuals or $16,100 for families.
Once you open an HSA, it is yours to keep.
HSAs are offered by banks, credit unions, and brokerage firms. When you open an HSA at a bank, it acts as a savings account. Some come with high interest rates and can be a good idea if you want to keep your savings liquid.
HSAs opened through brokerage firms can buy assets like stocks and bonds. This makes an HSA a type of investment account. Fidelity offers an HSA account, which is a popular option because it gives you access to low-cost index funds like FXAIX.
To figure out what type of account you’d like to open, take inventory of your needs:
- Do you want a debit card linked to your account, or are you okay with submitting a reimbursement?
- Do you have a long time horizon to invest your savings, or will you need access to it in the near future?
- What are the costs associated with the account, and how can it affect your growth potential?
Once your account is open, you can connect an external bank account to fund it. Any contributions you make can be deducted from your taxes at the end of the year.
How To Contribute to Your HSA
The IRS limits the amount you can contribute to your account. In 2024, individuals can contribute up to $4,150, while families can contribute $8,300.
Just like with retirement savings, you can use a strategy like dollar-cost averaging to consistently add to your account (just make sure you stay within the IRS’s limits).
Unlike a flexible spending account (FSA), anything you don’t spend in your HSA can be rolled over to the following year. That allows you to build a nest egg for future medical expenses and makes an HSA a good place to save for emergencies.
To get started, aim to have enough money saved up to cover your deductible. You want to have enough cash to cover it if you have a medical emergency.
After that, you can continue growing your savings or use it for preventative care purchases.
HSAs use pre-tax dollars, so consider using qualified preventative care expenses to reduce your annual tax bill.
READ MORE: Short-Term vs. Long-Term Financial Goals
What Are the Benefits of a Health Savings Account?
An HSA is a triple-benefited account. Not only can you deduct your contribution from your taxes, but your earnings can grow tax-free and you won’t pay any taxes on withdrawals.
Because HSAs use pre-tax dollars, this type of account can be used as part of a larger tax strategy to reduce your taxable income.
HSAs opened at brokerage firms and invested in assets like index funds can grow over time. The earnings are yours to keep. This can supplement your retirement savings as you get older.
Finally, you can use your HSA for a variety of health-related expenses including preventative care. Using an HSA can reduce some of the out-of-pocket expenses usually associated with maintaining a healthy lifestyle.
FAQs
What vitamins are covered by an HSA?
Typically, vitamins aren’t covered by an HSA, but if a doctor prescribes them, they may qualify. Prenatal vitamins are a good example of this. Other vitamins might include those that treat cardiovascular conditions, like fish oil pills.
IRS Publication 502 outlines what is and isn’t covered by an HSA.
How much does it cost to open an HSA?
It doesn’t cost anything to open up an HSA. These accounts can be opened like any other financial account.
Depending on who you open the account with, there may be an initial deposit requirement or monthly maintenance fees.
Can I use my HSA to cover my gym membership?
Yes, you can use an HSA to cover a gym membership, but only if your doctor determines it is medically necessary.
For exercise to be eligible, your doctor will have to prescribe it as part of a Letter of Medical Necessity. Talk to your medical provider first to see if you qualify.
TL;DR: Preventative Care Through Your HSA
If you’re enrolled in a high-deductible health plan, you may be able to open an HSA, to help offset the costs of eligible expenses like prescriptions and deductibles.
You can also use your HSA for preventative care, like first aid kits, wellness checks, sunscreen, prescriptive eyewear, and breast pumps. This way, you can keep yourself healthier and hopefully avoid a bigger medical emergency later on.
For more tips on managing your health and wealth, check out these episodes of the Erika Taught Me podcast:
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