Are health savings accounts (HSAs) a joke?
Last week I was at dinner with my friend Steve, and we were taking about the various ways you can save on your taxes. During the conversation I realized that he didn’t know a lot about HSAs. Not only that, but he also had a lot of misconceptions about them. Since he had misconceptions, I imagine so do a lot of you. So, I’m going to go over the important things you must know about HSAs, and if health savings accounts are a joke:
- What are health savings accounts?
- What rules do you need to follow regarding HSAs
- What are some of the pros and cons of HSAs
- 7 Popular Myths about HSAs
- How much can I contribute to an HSA
What are health savings accounts?
Health Savings Accounts (HSAs) were created by President George Bush senior back in 2003. They were created as part of a Medicare reform bill (Medicare Prescription Drug Improvement and Modernization Act) that allows people supplement their medical costs with a savings account. The bill laid out certain rules that people needed to follow.
What rules do you need to follow?
In order to fund an HSA you must have a High Deductible Health Plan (HDHP). That means your health insurance must have a high deductible. Additionally, you have a maximum amount you can withdraw from your HSA each year for medical costs (such as deductibles, co-pays, and co-insurance). They can be opened by you, or by your employer, on your behalf.
Pros and Cons of HSAs
Here are some of the pros and cons of having an HSA:
Pros
- Very tax efficient
- They work as both a Traditional IRA and Roth IRA at the same time
- You can have tax-free growth on the investments in an HSA
- It is utilized as a long-term savings account for retirement
Cons
- You must have a HDHP, that means your deductible for your insurance is higher than the average insurance deductible
- You need to manage the record keeping of medical expenses when you do decide to use it for medical reimbursements
- As with any investments, their are market risks you need to consider
- If you pull money out early for non-qualified expenses, you pay both tax and a 20% penalty
7 Myths About HSAs
Myth #1: HSAs are only for the rich
Even though it is true that if you make more money, it’s easier to fund an HSA, health savings accounts are for everyone. All you need is to have a HDHP, and you can fund an HSA, unlike IRAs that have income limits.
Myth #2: HSAs are “use-it, or lose-it”
One of the most popular misconceptions about HSAs are that if you don’t use the fund before the end of the year, you lose the money. Remember, it is a savings account, which means whatever you don’t use will be rolled forward from year to year. And if your employer funds your HSA, it’s yours to keep. Even if you quit or get fired.
Myth #3: You can only use HSAs for medical expenses
True, to be the most tax efficient, you should only use the funds in an HSA for qualified medical expenses. However, once you’re over the age of 65, if you decide you want to take the money out and use it for other purposes, you can, but you will have to pay tax on it, just like you do with a Traditional IRA. And when you’re over 65, you do not pay the 20% early withdrawal penalty
Myth #4: You can’t own an HSA if you’re over 65
When you turn 65, you’re eligible for Medicare, and you can no longer keep funding an HSA, but like I mentioned earlier, the money in the HSA is yours to keep and you can hold on to it and continue to use it to pay for qualified medical expenses, and in some cases some Medicare premiums.
Myth #5: You can’t use HSA funds for Dental or Vision
This is one of the biggest myths about HSA funds. You can absolutely use it for dental or vision, including routine dental cleanings, contact lens, and frames that require prescription glasses.
Myth #6: You can’t have an HSA and an IRA at the same time
Most everyone I know that has an HSA also has an IRA. It doesn’t matter if it’s a Roth or Traditional IRA, as long as you meet the requirements of each retirement account separately, you can have them at the same time.
Myth #7: You have to fund your HSA before the end of the year
Just like IRAs, you have until April 15th of the following year to fund your HSA and have it count. That means if wanted to fund my HSA and get the deduction for 2024, I have all the way until April 15th of 2025 to fund it.
HSA Contribution Limits at a Glance
| 2025 | 2024 | Change | |
|---|---|---|---|
| HSA contribution limits (employer + employee) | Self-only – $4,300 Family – $8,550 | Self-only – $4,150 Family – $8,300 | Self-only – +$150 Family – +$250 |
| HSA catch up contributions (age 55+) | $1,000 | $1,000 | No change |
| HSHP minimum deductibles | Self-only – $1,650 Family – $3,300 | Self-only – $1,600 Family – $3,200 | Self-only – +$50 Family – +$100 |
| HDHP maximum out of pocket amounts | Self-only – $8,300 Family – $16,600 | Self-only – $8,050 Family – $16,100 | Self-only – +$250 Family – +$500 |
Conclusion
So, are health savings accounts a joke? No way! They may not be for everyone, but they are great for individuals trying to save money for both retirement and unforeseen medical expenses.