Myth versus reality—what’s the real story on HSAs?

Healthcare costs continue to represent a significant portion of our expenses each year—today, they account for roughly 8% of our annual costs.¹ One way you can save for those expenses is with HSAs, which allow you to put money aside tax free. You can use the funds in your HSA today or you can save them for future use, even in retirement. 

A recent survey showed that nearly 90% of employees couldn’t identify the basic characteristics of an HSA.² So it’s no surprise that just one in five employees contributes to this type of account.³

Currently, you can only enroll in an HSA if you’re in a high-deductible health plan (HDHP), which, as its name suggests, offers higher deductibles (but lower premiums) compared with other health insurance options. If you have a choice in plans, HDHPs may make sense if you’re not anticipating high medical expenses—because if your medical expenses rise, you could pay up to $7,000 (individual coverage) or $14,000 (family coverage)⁴ in 2021 for out-of-pocket costs before your insurance kicks in.

There are limits on how much you can set aside each year in an HSA. In 2021, you’ll be able to save up to $3,600 in total HSA contributions (your and your employer’s contributions combined) if you have individual coverage—or up to $7,200 for family coverage. And if you’re age 55 or older, you can make an additional $1,000 contribution.⁴ The contribution limit applies for all HSAs combined, if you have more than one.  

In fact, an HSA offers a triple tax advantage:

• Your money is exempt from taxes when you save it.
• The interest you earn on your HSA grows tax free.
• You pay no taxes when you withdraw from it, as long as the money is used for qualified medical expenses. Just be sure to use your HSA money only for expenses that qualify. If you don’t, you could pay taxes—plus a penalty that’s 20% of the withdrawal amount if you’re under age 65.

Now that you know more about the basics of HSAs, let’s take the mystery out of them point by point.

Not so! Workers often confuse HSAs with flexible spending accounts (FSAs), since they’re both ways to use pretax money for medical costs. With an FSA, however, you can only put aside a maximum of $2,750 (2020),⁵ and you must use the money for medical expenses in that year—or forfeit it—so it’s important to carefully estimate the amount you’ll need. You can use a debit card to pay for expenses, or you may need to submit a claim with proof that your costs are valid. An FSA can be paired with any insurance plan—and you don’t have to be in an employer health plan to use an FSA that you get through work.

Not true! Unlike an FSA, your entire HSA balance carries over from year to year. Any money left in your account at the end of the year will be rolled over to the following year. That way, you can save more than you’ll need each year to be ready for future medical expenses. The balance in your HSA may remain as cash savings or be invested (or both), depending on how your account works. Some HSAs let you invest in mutual funds, exchange-traded funds, or even individual stocks.  

Not necessarily! You just need to be actively enrolled in an HDHP to be eligible. If your employer doesn’t offer an HDHP or you’re unemployed, you can get an HSA through one of the many financial services companies that offer them. In that case, you’ll contribute funds to your HSA and deduct them on your taxes later. If you contribute to an HSA through your employer, the savings are automatically deducted from your paycheck for direct deposit into the HSA. 

Using an HSA is easy! Many plans come with a debit card that gives you instant access to your money to pay for qualified medical expenses, including co-pays, prescriptions, and even dental fillings and eyeglasses. It works just like a normal debit card, as long as there are funds in your account. If you have family coverage, you can request additional debit cards for your spouse and eligible dependents to pay their qualified expenses.

You can contribute to an HSA until age 65—even when you're not working. If your healthcare coverage switches to a non-HDHP option, however, you’d need to stop making HSA contributions. The good news is that all the money in your HSA is yours to keep for future healthcare expenses—even if it’s through your company and you leave or retire. And if you have more than one HSA, you can combine accounts—but be sure to understand the rules so that your HSA can remain tax free.

HSAs can be an important part of your retirement savings strategy. Since your unused HSA balances roll over from year to year, and, in some cases, can be invested, it can help you build reserves for your future. As mentioned earlier, medical expenses represent significant costs—and they become more significant in retirement. In fact, the average couple will need an estimated $270,000 in savings for a 90% chance of being able to cover medical costs when they’re retired.⁶ HSAs can help cover a full range of medical costs in retirement—including Medicare expenses. 

If you’re relatively healthy and anticipate low medical expenses for the coming year—and you want to save for future medical expenses—you may want to consider an HSA. You can enroll in one if you’re in an HDHP through your employer or an outside provider. Be sure to look at your estimated healthcare expenses versus the amount you’ll be saving in premiums, then determine whether you can handle the out-of-pocket deductibles, in case unexpected healthcare costs come up. To learn more about your options, check with your employer, financial professional, or healthcare provider.