Health savings account

This article contains details specific to United States (US) investors. It does not apply to non-US investors.

A Health savings account (HSA) is a special account which is used in conjunction with a high deductible health plan. Unlike a flexible spending account, unused money remains in the account and can be invested; most accounts offer either mutual funds or brokerage accounts for investing.

HSAs are often referred to as "triple-tax advantaged", a feature that makes them unique among all investment accounts. Contributions are tax-deductible on federal and most state tax returns; earnings and withdrawals are also tax-free if used for medical expenses. After age 65, you can use HSAs for non-medical purposes, with these withdrawals taxed like a traditional IRA. For this reason, investors should usually contribute to an HSA before making unmatched retirement account contributions.

You must be covered by a high deductible health plan to make HSA contributions. Unlike most health insurance, the high deductible plan pays nothing except for preventive care until you meet a fairly high deductible. Determine if this type of plan is appropriate for your personal circumstances and health care needs. If it is, then using the HSA as an investment account can be advantageous.

How an HSA works

IRS Publication 969 contains the details of how HSAs work.

Basics

You are eligible to contribute to an HSA if you meet the following requirements:

• You are covered under a high deductible health plan
• You have no other health coverage, except for dental, vision, and other specific exceptions
• Neither you nor your spouse participates in a general purpose Flexible Spending Account (FSA) (because an FSA can be used to reimburse a spouse's medical expenses)
• You are not enrolled in Medicare
• You are not eligible to be claimed as a dependent on someone else’s tax return

You may withdraw from the HSA tax-free to reimburse qualified medical expenses, even if you are no longer eligible to contribute. Notably, there is no time limit for how long you can wait to withdraw money to reimburse yourself for the expense. This feature allows a strategy where you can save receipts for eligible expenses for years or decades, while letting the HSA grow tax-deferred. You can then withdraw from the HSA tax-free later in life for past medical expenses and retirement medical expenses.

You pay tax on withdrawals for other purposes as ordinary income, with an extra 20% penalty. The penalty is waived if you are at least 65 or disabled. Because withdrawals after age 65 are taxable but penalty-free, the account can also behave like a traditional IRA when used this way. Because these features allow additional tax-advantaged retirement savings, HSAs are sometimes referred to as "Stealth IRAs".

Contribution limits

The 2025 annual limit is $4,300 for an individual plan, or $8,550 for a family plan (defined as covering an eligible individual plus at least one other individual), plus $1,000 catch-up contributions if you are at least 55. Contribution limits include both contributions from the HSA participant as well as employer contributions, which are not included in your taxable income. Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.

Contributions for a family plan only get one $1,000 catch-up even if both spouses are age 55+. This limitation can be circumvented by the other spouse opening up an HSA in their name and contributing $1,000 (or more, as long as the total contributions for both spouses do not exceed the family plan limit plus two catch-ups). HSA contributions have no minimum or maximum income, and these contributions will reduce taxable income on a Married Filing Jointly tax return even if the other spouse has no income. HSAs are always individually-titled accounts.

If you are enrolled in an HDHP for only part of the year, the maximum contribution amount varies based on several factors. The last-month rule lets you contribute the full annual contribution for a tax year if you are eligible to contribute on December 1st of that year, as long as you remain eligible to contribute through December 31st of the following year. The last-month rule also lets you contribute the family limit for the year if you have family HDHP coverage on December 1st, even if you only had individual coverage earlier in the year. For more complicated situations involving part-year coverage and/or changing between individual and family coverage, the annual limit is prorated by month; see IRS Publication 969 for specifics.

If you or your spouse have a general-purpose healthcare FSA, you are both ineligible to contribute to an HSA. However, a limited-purpose FSA, such as a Dependent Care FSA, does not disqualify anyone from contributing to an HSA.

A non-dependent child who is still covered only by a parent's HDHP (in other words, meets the requirements listed under basic HSA rules) may contribute the family maximum to his or her own HSA. The child's HSA is completely separate from the parent's HSA.

You have until April 15th of the following year to contribute to your HSA for a given tax year.

Tax considerations

Unlike many other tax deductions, there are no income restrictions to contribute to an HSA. Contributions to an HSA reduce your federal adjusted gross income (AGI) dollar for dollar, possibly making you eligible for income-based credits or Roth IRA contributions you would not otherwise be eligible for without the HSA deduction.

If your employer allows it, you can make your own contributions through pre-tax payroll deduction; this has the potential advantage that these contributions, like pre-tax insurance premiums, are not subject to Social Security and Medicare taxes (collectively known as payroll or FICA taxes), so long as the plan is classified as a Section 125 or "cafeteria" plan. If you are below the Social Security Wage Base, the reduction in Social Security taxes may reduce your future Social Security benefits. The benefit or drawback of saving Social Security tax depends on your lifetime earning record. Generally, high earners come out ahead by avoiding FICA taxes, low earners come out behind, and middle earners come close to breaking even. See: Social Security as an investment and below.

State taxation of HSAs

While contributions are deductible on your federal income tax, this is not always true for state income tax. The following states do not conform to federal legislation and do not recognize HSAs, so contributions are not deductible and earnings are taxable:

• California
• New Jersey

If you live in one of these states you must treat the HSA as a taxable account for state tax purposes, and keep track of tax lots, dividends, capital gains, distributions, and so on within the account. The IRS does not require HSA administrators to send you tax forms (such as 1099-INT or 1099-B), so you have to keep good records, track the state cost basis manually, and report any HSA investment income on your state tax return. If you live in one of these states, consider keeping your HSA investments especially simple to limit the work involved in this non-trivial task.

You may be able to include amounts paid for medical expenses as an itemized deduction on the state tax return, subject to AGI floors, but only in the year you incurred the expense.

If you live in one of these states, consider investing the HSA in Treasury bonds or TIPS, which are exempt from state taxes. (In California, you would pay state tax on capital gains issued by a TIPS/Treasury mutual fund or capital gain/loss on the sale of Treasury mutual fund shares, but even if you do, most of the returns from Treasury bonds and TIPS would be income which is not subject to state tax. New Jersey exempts capital gains on Treasuries from state tax.) tax loss harvesting may be possible on the state tax return if you have capital gains or the state allows carryovers of capital losses.

If you move from a state which does not tax HSAs to a state which taxes HSAs, sell any holdings with capital gains before you move, so that you will not pay taxes on the same capital gains when you sell the same holdings later as a resident of the state. You can buy back the same or similar holdings immediately after selling.

In states that tax contributions, be aware that Federal tax-free rollovers into an HSA, such as the once in a lifetime IRA to HSA rollover, and an Archer MSA to HSA rollover, are treated as a non-qualified withdrawal from the IRA/MSA at the state level and subject to income taxes and penalties on the state return. Also in states that tax contributions, the state treats the HSA as a taxable account, so that taxable investing rules apply.

Withdrawals

Withdrawals for qualified medical expenses (as outlined in IRS Publication 502, Medical and Dental Expenses) that you, your spouse, and any dependents incur after you establish the HSA are tax-free. These include medical expenses you incur after you are no longer eligible to contribute to the HSA. As long as you keep proper records, there is no limit for how long you can wait to reimburse yourself for qualified expenses. Medical expenses from before you established the HSA are not eligible for tax-free withdrawals, even if you had HDHP coverage and would have been eligible to contribute to an HSA.

State law determines when an HSA is established. Most state laws require that a trust be funded to be established. This means that in most cases an HSA is not established until your first contribution goes into the HSA.

Withdrawals to pay for some types of medical insurance premiums are also tax-free. As detailed in Internal Revenue Bulletin 2004-2 (January 12, 2004) - Health Savings Accounts - Q&A 27, you can use HSA funds to pay for qualified long-term care insurance (but only up to IRS specified dollar amounts), COBRA health care continuation coverage, and health care coverage while receiving unemployment compensation. Furthermore, once reaching age 65, you can pay premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance (including premiums for employer-sponsored retiree health insurance) from an HSA. Premiums for Medigap policies are not qualified medical expenses and therefore cannot be paid tax-free from an HSA.

There was further clarification in Internal Revenue Bulletin: 2008-29 (July 21, 2008) - Notice 2008-59 - Health Savings Accounts - Q&A-29. Payment of Medicare Part D premiums. This Q&A clarified that Medicare Part D premiums are eligible expenses. The previous 2004 guidance had came out before Medicare Part D was established in 2006, therefore this guidance provided clarity for Medicare Part D premiums.

Rollovers/Transfers

You can move money between HSA custodians through direct rollovers and trustee-to-trustee transfers. The rules are exactly the same as IRA Rollovers and Transfers. You may want to do this annually if you contribute to a plan through your employer's payroll deduction to gain the social security and medicare payroll tax exemption, but you do not want to leave the funds there long-term if the investment options are not good. The HSA custodian(s) may charge a fee for a trustee-to-trustee transfer; you can usually rollover directly without a fee.

You can make a once-in-a-lifetime rollover or transfer from an IRA to an HSA up to the annual HSA contribution limit. This is usually not a good idea, because you then lose the ability to contribute and take an HSA tax deduction for the amount you transfer, but it can be an emergency source of funds without paying taxes or penalties. See IRS Notice 2008-51. You can also roll over an Archer MSA to an HSA. If you live in a state that taxes HSA contributions, these rollovers have the additional drawback of incurring state taxes and penalties.

Medicare

See also: Medicare

Social Security recipients 65 years of age or older are automatically enrolled in Medicare Part A and therefore ineligible to contribute to a Health Savings Account.

You must stop contributing to your HSA when you enroll in Medicare. However, you may use money that is already in your HSA after you enroll in Medicare to help pay for deductibles, premiums, copayments, or coinsurance.

Premium-free Part A coverage begins six months back from the date you apply for Medicare (or Social Security/RRB benefits), but no earlier than the first month you were eligible for Medicare. To avoid a tax penalty, make your last HSA contribution the month before your Part A coverage begins.

If you contribute to your HSA after your Medicare coverage starts, you may have to pay a tax penalty. Generally, you must pay a 6% excise tax on excess contributions. The excise tax applies to each tax year the excess contribution remains in the account.

If you expect to have a much larger HSA balance than your medical expenses, give consideration to using Medicare supplement plan G - high deductible. You would save on supplement premiums relative to the regular plan G and could use the HSA to pay deductibles. This would convert an expense that is not HSA-eligible (supplement premium) to an expense that is eligible (meeting deductible for part B services). Other, less generous and cheaper supplement plans might also be worth considering.

Death of HSA holder

A spouse beneficiary can inherit an HSA. Any other beneficiary will receive the HSA as a taxable distribution. See the Inherited HSA section below for more details.

How the account operates

Details vary among HSA custodians, but in general you can withdraw no more than your current HSA balance. This differs from FSA distributions that allow withdrawals up to your planned contribution amount, even if you have not yet made all those contributions. The custodian may provide you with checks or a debit card to pay medical providers, and you can make online withdrawals from the HSA.

When you file taxes, Form 8889 is how you tell the IRS how much of those withdrawals were for qualified medical expenses.

Some HSA custodians require you to keep a certain amount of your HSA as cash, while others allow you to invest using the same choices you would have with an IRA at that custodian.

You can choose your custodian, and transfer accounts between different custodians. However, if your health plan or employer makes a contribution, it may select the custodian to which it makes contributions, and may offer other incentives such as waiving service fees.

How to use the plan

See also: Health savings account as an emergency fund

There are two ways to use the HSA. You can either pay all your medical expenses from it, or pay out of pocket and save the plan money for medical expenses in retirement. Even if you use the HSA to pay current expenses, you will likely accumulate more than you spend, and can invest the remainder for medical expenses in retirement.

Contribution priority compared to other accounts

Main article: Prioritizing investments

Usually, you should contribute to an employer retirement plan when you get a match, and pay off high-interest debts, before contributing to an HSA. But, you should contribute to an HSA before an employer plan when you do not get a match, or an IRA. The reason is that HSA contributions are tax-deductible, and if your medical expenses are high enough, the withdrawals can be tax-free too. With retirement accounts, either the contributions (pre-tax accounts) or withdrawals (Roth accounts) are tax-free, but not both. In the worst case where you do not have sufficient medical expenses to later withdraw tax-free, withdrawals after age 65 are taxable but penalty-free, so the account behaves similarly to a pre-tax retirement account (traditional IRA, 401(k), and others).

In addition, HSA contributions via employer payroll deduction are exempt from FICA taxes, where 401(k) and IRA contributions are not, and this is usually a benefit. Higher-income investors above the second Social Security bend point should expect a low or negative rate of return on Social Security taxes, so avoiding these taxes is a big benefit. Investors between the first and second bend-points can expect a modest return, and the benefit of avoiding Social Security taxes is not clear. Those below the first bend-point can expect an excellent return on Social Security taxes and should not avoid them. But, you can choose to pay FICA taxes on HSA contributions by contributing directly to the custodian, rather than via employer payroll deduction.

You will also see a benefit in avoiding payroll tax if it will not affect your future Social Security benefits, such as when:

• You will not accrue 40 work credits (equivalent to ten years) necessary to qualify for Social Security benefits
• The current year will not be one of your top 35 earning years (adjusted for inflation)
• You expect to collect Social Security benefits based on someone else's earnings record
• Your earned income this year will be higher than the Social Security Wage Base ($168,600 as of 2024), which saves Medicare taxes only

See Social Security as an investment for more details.

During working years

During your working years, the choice of withdrawing from an HSA to pay for medical expenses, or paying them out-of-pocket, comes down to what you would otherwise do with the money. If withdrawing from the HSA means you can contribute more money into retirement accounts, that is the better choice. If you can afford to pay out-of-pocket for the medical expenses and would otherwise invest the money in a taxable account, it is probably better to pay out-of-pocket, although there are exceptions.

Maxing out retirement accounts

If you are maxing out your retirement accounts, you should probably pay for current medical expenses out-of-pocket and leave the money in the HSA. This strategy treats the HSA as an opportunity for further retirement savings, like an IRA, with the plan to not withdraw from it until you retire. If you have $1,000 in medical bills, paying them out-of-pocket leaves the $1,000 in the HSA to grow tax-deferred or tax-free, and keeps the right to withdraw $1,000 tax-free in a future year (if you save records appropriately). If you pay the expense from the HSA, you will have an extra $1,000 to invest in your taxable account, which will grow more slowly due to tax drag.

The biggest advantage of leaving the money in the HSA comes from the possibility that medical expenses will allow the growth on the money to also be tax-free. This can happen due to future medical expenses (including Medicare premiums), or if you have so many other past medical expenses that the HSA balance is unlikely to ever exceed them. In this case, future growth and withdrawals will be tax-free, similar to a Roth account.

However, if you expect your HSA balance to be so large (and/or your medical expenses to be so small) that you will have to take taxable withdrawals, there may be better strategies. See: Overfunded HSA below.

Not maxing retirement accounts

If you are not maxing out your retirement accounts, you should pay current expenses from the HSA. If you are in a 24% tax bracket and have $1,000 in medical bills, taking $1,000 from the HSA to pay the bill means you can invest an extra $1,000 in your Roth IRA or $1,316 in your 401(k), either of which will be as good or better than leaving it in the HSA.

If you keep the $1,000 in the HSA and pay the expense out-of-pocket, you will have the right to withdraw $1,000 tax-free from the HSA later, but the growth on the $1,000 might be tax-free or taxable depending on your medical expenses. The right to withdraw the $1,000 tax-free could even be lost if you leave the HSA to a non-spouse, or if you lose the receipts. But if you pay the expense out of the HSA and invest the $1,000 in a Roth IRA, your future gains will always be tax-free to you and your heirs, and your heirs get an additional ten-year stretch. If you invested $1,316 in a 401(k), that is just as good after adjusting for the presumed 24% tax you will pay in retirement.

Withdrawing in retirement

Main article: Retirement draw-down priority

After you retire, you can withdraw from the HSA an amount equal to your past medical expenses plus any current expenses tax-free, and withdraw from your other accounts for non-medical expenses. HSAs can be used to pay medicare premiums and other medical expenses in retirement. If you are too healthy in retirement and cannot use the HSA for medical expenses (even past ones), the non-medical portion is still as good as a traditional IRA once you are age 65.

Tax-free withdrawals

If you need cash for spending and are choosing between withdrawals from an HSA and a Roth account, withdraw from the HSA tax-free (based on past and current medical expenses) before withdrawing from Roth accounts. Withdrawing tax-free from an HSA will almost always be better, and never worse, than withdrawing from a Roth account, because:

1. Foregone future growth on the HSA money may or may not be tax-free, whereas growth on the Roth money will always be tax-free (as long as you meet the basic distribution requirements) with the additional benefit of a ten-year stretch.
2. It is possible that the HSA money might later become taxable if you wait to withdraw (if receipts get lost, someone forgets to make a qualified withdrawal, or the account is left to a non-spouse).
3. It eliminates the need to keep receipts for those expenses going forward (once the normal retention period for tax records has passed), along with the risk they could get lost, destroyed, have ink fade, and so on.

If you need cash for spending and are choosing between withdrawals from an HSA and a pre-tax traditional account, consider instead the combination of tax-free HSA withdrawal and a Roth conversion. This has the same tax impact as a pre-tax withdrawal, but shifts money from an HSA to a Roth account, which is desirable for the above reasons. Therefore, you should always withdraw tax-free from an HSA before retirement accounts.

In some cases, it can make sense to withdraw tax-free from an HSA as a tax-planning maneuver even if you do not need the money for spending, and reinvest it in a taxable account. Examples include when:

• You think there is a chance the money will not be later withdrawn tax-free, because the receipts might get lost, you or your surviving spouse might forget, or you plan to leave the money to a non-spouse and could die suddenly.
• You might have an overfunded HSA. Although the dollars in the taxable account will grow more slowly, the lower tax rates on long-term capital gains and the step-up in basis should more than compensate for stock-like investments. See below for more details.

As you reach later retirement, the benefit of continuing to leave money in the HSA decreases (there are fewer years of potential tax-advantaged growth) and the risk of losing the right to withdraw tax-free increases. How long you want to push it is a personal decision, but there will be a point when the benefits no longer outweigh the risks, unless you have named a charitable organization to inherit your HSA. In mid- to late-retirement, withdrawing the HSA roughly evenly over your life expectancy could be a reasonable compromise.

Taxable withdrawals

Taxable withdrawals from an HSA usually do not make sense when other sources of funding are available, because possible future medical expenses would allow future tax-free withdrawals. If you have current or past medical expenses for which you have saved receipts, and can therefore take a tax-free withdrawal, it is almost always better to do so rather than take a taxable withdrawal. Taxable HSA withdrawals can provide a source of funding when other assets have been exhausted. Taxable withdrawals can also be beneficial for tax-planning when you have an overfunded HSA; see below.

How to invest the HSA

If you are paying current expenses out of pocket, the HSA is intended for medical expenses in retirement. You should therefore invest it as if part of your IRA or 401(k), as those accounts are also invested for retirement expenses. If you are using the HSA for current expenses, consider at least one year's deductible as part of your emergency fund, because it is likely you will need this amount for medical bills; you can invest the remainder as if part of an IRA or 401(k).

If you view the HSA as part of your overall retirement portfolio, you can then choose which assets from your asset allocation to hold in your HSA, and which to hold elsewhere. If you live in a state that does not recognize HSAs, state taxes give a strong incentive to hold Treasury bonds or TIPS there. In the other states, HSAs are similar to Roth accounts in terms of the principles of tax-efficient fund placement for tax free accounts. If you have an overfunded HSA, it will behave less like a Roth account and more like a traditional IRA (or even a non-deductible IRA) for asset location purposes, and it could make sense to shift your HSA to contain bonds rather than stocks.

Overfunded HSA

An overfunded HSA is one where the balance exceeds, or is likely to exceed, available qualified medical expenses over your and your spouse's lifetime.

While this can happen, many retirees underestimate their healthcare expenses. High savers may find themselves in higher IRMAA tiers, leading to additional qualified medical expenses because Medicare premiums (including IRMAA) are qualified medical expenses for an HSA.

An overfunded HSA may also be intentional, because a high earner planning a lower cost retirement may enjoy the similarity to a traditional deductible IRA and be happy to save a high marginal rate and then pay a lower marginal rate when withdrawing after age 65.

Overfunded HSAs usually result from leaving money invested inside the HSA over long periods of time, where the balance can compound fully tax-deferred; medical expenses do not compound even if they accrue annually.

Cautions

If you are younger and your future medical expenses are very uncertain, it is probably best to leave money in the HSA as long as possible, to prepare for the more likely case that your future medical expenses will let you eventually withdraw the entire HSA balance tax-free.

Withdrawals for non-medical expenses are taxable, and also have a 20% penalty if you are under age 65. Large HSA balances also increase the risk of leaving your heirs with a large spike of taxable income in a single year. The tax advantages of an HSA are much better when you are able to use it for qualified medical expenses and withdraw tax-free.

Leaving money in the HSA also has the benefit of many decades of tax-deferred growth, which can overcome higher tax rates that might come later on. Actions to mitigate an overfunded HSA are best taken once you are closer to retirement or already in retirement, when you have much less uncertainty about the relative sizes of your HSA and medical expenses.

Mitigations

If you might unintentionally have an overfunded HSA, consider one or more of the following strategies to mitigate the tax impact:

• Pay for medical expenses out of the HSA even when you are maxing out your retirement accounts.
• Withdraw tax-free from your HSA even if you do not need the money for spending, and reinvest the money in a taxable account.
• Shift your bond allocation into the HSA and stock allocation into retirement accounts.
• During the accumulation phase, switch to a non-HSA-eligible medical plan (that is, a low-deductible plan) if those premiums are competitive.
• Choose Medicare supplement plans with smaller premiums but higher deductibles, which shifts non-HSA-eligible expenses to HSA-eligible expenses.
• Spread the HSA out over multiple beneficiaries.
• Name a charity or Donor Advised Fund (DAF) as the beneficiary of the HSA, if you were planning to leave some of your estate to charity.

If you expect to not live much longer and plan to leave an overfunded HSA to non-spouse heirs, taxable HSA withdrawals should be a higher priority than pre-tax retirement accounts. Unlike pre-tax accounts, HSAs do not get a ten-year stretch, which means heirs do not get up to ten years of tax-protected growth, and if the balance is large on a per-heir basis, the large income in a single year can spike their tax rates more than if it were spread across ten years.

Similarity to a non-deductible IRA

The up-front tax deduction and potential for tax-free growth is what makes HSA contributions better than most other retirement account contributions when Prioritizing investments, as noted above. Treating the HSA balance above qualified medical expenses as a traditional IRA (except without the ability to convert to Roth) is a reasonable perspective. You may also consider the decision of whether to leave money inside an overfunded HSA that you can now withdraw tax-free as similar to deciding whether to invest in a non-deductible traditional IRA. If you make a tax-free withdrawal from an HSA, you can reinvest an equal number of dollars in a taxable account. Although the balance would grow with tax drag, future gains are taxed at lower long-term capital gains rates. If the HSA is overfunded, future growth within the HSA will be taxable at higher ordinary income rates. And importantly, a taxable account gets a step-up in basis at your death, whereas an HSA does not. The decision to withdraw tax-free also depends on which assets you plan to hold in your HSA; stocks tend to perform better when reinvested in a taxable account, while bonds tend to perform better inside an HSA. See: Comparison between a non-deductible traditional IRA and a taxable account.

If you reduce your projected HSA balance so that you no longer expect it to exceed available medical expenses, the HSA will switch to behaving more like a Roth account (albeit one you should spend down over your lifetime). Further tax-free withdrawals would be trading future tax-free growth for taxable growth and so would probably not be beneficial. Balancing your HSA balance and expenses regularly as you move through retirement is a good strategy.

Inherited HSA

Spouse beneficiary

When an HSA holder dies, a surviving spouse who is a beneficiary may assume the HSA as their own, and so reimburse qualified medical expenses of the deceased spouse after assuming ownership of the HSA, free of taxes.

Non-spouse beneficiary

The rules for a non-spouse beneficiary, however, are more complicated. When the HSA account-holder dies and does not leave the account to their spouse, the entire value of the HSA becomes taxable to the beneficiary in that year. However, the beneficiary may pay the decedent's unpaid medical expenses, and reduce the taxable amount by the amount paid within 1 year after the date of death. If you leave the account to your estate, the value is included on your final income tax return.

Unlike an inherited IRA or 401(k), an HSA inherited by a non-spouse ceases to be a tax-advantaged account, and qualified medical expenses incurred by the decedent can no longer be reimbursed tax-free. As a result, from an estate planning perspective, an HSA has no more value to a non-spouse, non-charitable beneficiary than an equal amount of taxable income, and much less value than an equal amount of cash. For this reason, you should plan to spend down your HSA roughly over your lifetime, and not wait until you are too old to withdraw for past medical expenses. See Withdrawing in retirement for strategies on how to mitigate the HSA's estate planning characteristics, and Overfunded HSA for strategies to deal with an HSA that is larger than available qualified medical expenses.

Advantages

HSAs are unique among investment accounts in that they can be fully tax-free (contribution, growth, and withdrawal) when used for qualified medical expenses. As most investors will have substantial medical expenses over their lifetime, HSAs provide an opportunity for substantial tax savings compared to using other accounts. Many HSAs are available with great low-cost investment options consistent with Bogleheads®-style investing.

As with a flexible spending account, an HSA allows you to contribute tax-deductible dollars and spend them tax-free on medical costs. However, money in a flexible spending account is lost if not used within a grace period after the end of the year, so you can only use it for expected expenses and will pay unexpected medical expenses with after-tax dollars. The HSA allows you to pay all your expenses with pre-tax dollars as long as they fit within the HSA limit, and what is not used continues to roll over to following years.

Disadvantages

The main potential disadvantage of the HSA is not the account itself, but the high-deductible plan that goes with it. If you have very low expenses, the high deductible does not matter; if you have very high medical costs, the plan must have a catastrophic maximum out-of-pocket cost which may also save you money. If your expenses are near the deductible, you may be better off without the HSA, using a conventional plan instead. HSAs are not available from all major fund companies, and often have maintenance fees, but there are some good ones in the HSA custodians and options section just below.

As an account, the main disadvantage of HSAs is their poor estate planning characteristics. When left to a non-spouse, the right to withdraw for past medical expenses of the owner is lost, and the entire balance becomes taxable in a single year (although leaving the HSA to a charitable organization eliminates any tax). These characteristics drive the strategies on how to best use an HSA. See Inherited HSA for details.

An HSA may be challenging for someone without a sufficient emergency fund; see Prioritizing investments. In contrast to an FSA where the entire amount may be available on January 1 each year, funds for an HSA are not available until they are deducted from your paycheck over the course of the year.

To maximize the tax benefits of the HSA, you may need to store medical receipts for many years or decades before requesting reimbursement. This creates extra work, with the risk that records could be lost, degraded, or destroyed. Filing for reimbursement in the distant future is more difficult than seamless immediate reimbursement when an insurance company directly bills the HSA provider.

Comparison to retirement accounts

Comparison between HSAs and common retirement accounts

Feature	HSA	401(k)s, 403(b)s, and IRAs	Advantage
Contribution limits	$4,300 for an individual or $8,550 for a family, plus a $1,000 catch-up contribution for age 55+. This limit applies to the combination of employee and employer contributions.	$23,500 ($34,750 for age 60-63, or $31,000 for other age 50+ with catch-up) elective deferral for all employer retirement accounts. $70,000 ($77,500 or $81,250 with catch-up) total employee and employer contributions into each unrelated employer plan. $7,000 ($8,000 including catch-up) to an IRA for every person with an earned income, and spousal contributions are permitted.	Retirement accounts have higher contribution limits, but investors should still contribute to the best account for their individual situation first, which is usually the HSA.
Income limits	No income limits for making or deducting HSA contributions. You can contribute to an HSA without any earned income.	Deducting traditional IRA contributions has a low income limit when one is covered by a retirement plan at work. The limit is higher for spouses not covered, and there is no limit if the single filer or both MFJ filers are not covered. Roth IRA contributions have a higher income limit, but this limit can be circumvented by the Backdoor Roth IRA process. No income limits for employer plans. Contributions must be from earned income, but it is possible to contribute to both a Roth 401k and an IRA based off the same earned income.	HSAs have an advantage over IRAs for investors looking for deductible savings beyond employer plans, and in years where you have no earned income.
Tax structure	HSAs are “triple tax-free” when used for qualified medical expenses: contributions are deductible, growth is tax-protected, and qualified withdrawals are tax-free. Non-qualified withdrawals after age 65 are penalty-free but taxable, so the account behaves like a pre-tax retirement account in this case.	Deductible retirement account contributions are taxable when withdrawn. Roth contributions are taxable when made but tax-free with withdrawn. Non-deductible IRAs are a special case.	HSAs are fully tax-free in the most common case where sufficient medical expenses are available. In the worst case when they are not, the HSA behaves like a pre-tax retirement account. For this reason, HSAs will be as good or better than retirement accounts for taxes, and investors should usually contribute to an HSA first.
State taxes	HSA contributions are tax-deductible in all income-taxing states except for California and New Jersey.	Massachusetts does not allow deductions for traditional IRA contributions, but they do for all other pre-tax retirement accounts (401k, 403b, etc.). New Jersey does not allow deductions for contributions to retirement accounts except for a pre-tax 401k. Pennsylvania does not allow any retirement account deductions, but does not tax retirement withdrawals, so they behave like Roth accounts for state tax purposes. Alabama, Colorado, Maryland, Michigan, New Jersey, and New York exclude some federally-taxable retirement withdrawals from taxation. Illinois, Iowa, and Mississippi do not tax any distributions from retirement accounts, but allow deductions for pre-tax contributions. Georgia has a large exemption for all income in retirement, making retirement withdrawals tax-free for many retirees. Other income-taxing states follow federal tax rules for retirement accounts.	Investors in California or New Jersey will probably still come out ahead using an HSA for medical expenses compared to a retirement account.
Payroll taxes	HSA contributions made through an employer payroll deduction are payroll tax-deductible. Contributions made directly to a HSA custodian are not.	Retirement plan contributions are not payroll tax-deductible, except for employer contributions to an employer plan.	Investors above the second Social Security bend point and/or above the Social Security Wage Base will see an advantage with the payroll tax deduction. Investors who do not want to avoid payroll tax can contribute directly to the HSA custodian. HSAs have the advantage.
Employer contributions and matching	Employers will sometimes contribute a fixed amount into employees’ HSAs, but usually not based on matching calculations.	Employers will sometimes offer a match for employer plan contributions. IRAs do not get a match.	Employer plan, if matching is offered. Getting an employer match should be a top financial priority.
Investment choices	HSAs only allow a set of investments offered by the plan, which may be limited.	Employer plans only allow a set of investments offered by the plan, which may be undesirable. Some plans have a brokerage option allowing trading of stocks and ETFs, and occasionally a plan will have unusual investments (a stable value fund, annuities, real estate funds, etc.) that could be uniquely valuable to certain investors. IRAs offer a wide variety of investments. Self-directed retirement accounts offer an even wider range of investments.	Plan-dependent. IRAs usually have an advantage over employer plans and HSAs. But, there are plenty of HSAs and employer plans with sufficient variety of good investments to build a portfolio.
Fees	Most HSAs have modest fees in the 0.3%/year range, and may also require a certain balance to be kept in cash rather than invested. Investors can choose their own HSA custodian, and at least one offers fee-free HSAs (Fidelity), but if it is not the custodian chosen by your employer, you will lose the payroll tax deduction by contributing directly.	Employer plans can have high fees (~1-2%+ per year), but plan fees have come down on average in recent decades, and many have no fees except those within the offered mutual funds. Most IRA custodians offer fee-free IRAs.	Depends on the plan. HSAs tend to have higher fees than IRAs and good workplace plans, but are usually better than bad workplace plans. You can choose a fee-free HSA custodian (like Fidelity), but if you contribute through an employer, you will have to periodically roll over money into your preferred custodian.
Compatibility with Backdoor Roth IRA	HSA balances do not interfere with the Backdoor Roth IRA.	Pre-tax traditional (along with SEP and SIMPLE) IRA balances do interfere with the Backdoor Roth IRA, but workplace plan balances do not.	HSAs have an advantage over deductible traditional IRAs.
Early distribution options	Tax- and penalty-free withdrawals are always allowed for current medical expenses, and past medical expenses that accrued after the HSA was established and for which you have saved the receipts. Otherwise, nonqualified HSA withdrawals are taxed as ordinary income and also charged a 20% penalty. The penalty is waived after age 65.	Withdrawals before age 59½ are charged a 10% penalty, with the following exceptions: disability, SEPP, IRS levy, medical expenses, separation from service age 55 or older, and others. Plans may offer loans, hardship withdrawals, and/or in-service withdrawals, but whether these withdrawals incur penalties is subject to IRS rules. Roth IRA contributions can always be withdrawn tax- and penalty-free. Otherwise, early withdrawals are taxable and charged a 10% penalty.	Early HSA early withdrawals are more heavily penalized by paying twice the penalty rate, paying taxes that might otherwise not need to be paid, and the higher age limit. However, in practice most HSA owners will have plenty of medical expenses that can be used for qualified withdrawals, and those with overfunded HSAs probably have other sources of funds, so this is not usually a serious disadvantage.
Record retention	When using an HSA as an investment account and leaving money in the account for tax-advantaged growth, you will need to save records for all medical expenses you incurred after the HSA was established. Storing and preserving these records over potentially many decades is not a trivial effort.	Retirement accounts generally require minimal record retention. Roth IRA owners should keep a record of when the account was first established, contributions, and any Roth conversions, to avoid unnecessary taxes and penalties on distributions. Traditional IRA owners making non-deductible contributions need to keep track of their basis.	In order to realize the main tax benefits of an HSA, you may need to carefully keep records over long periods of time. If you are not confident you will be able to keep records, you should likely contribute to retirement accounts first.
Asset protection	HSAs do not receive federal protection from bankruptcy or creditors. Some states protect HSAs from bankruptcy and creditors but most do not.	ERISA 401(k) and 403(b) plans are protected from civil judgments and bankruptcy at the federal level. IRAs receive state-level protection from civil judgments, which varies widely by state. Traditional and Roth IRAs are exempt from federal bankruptcy up to $1.0M, and SEP and SIMPLE IRAs receive unlimited exemption.	HSAs are worse than ERISA employer plans. HSAs also tend to be worse than IRAs, but it is more state-dependent.
Required Minimum Distributions	HSAs have no Required Minimum Distributions (RMDs).	Pre-tax retirement accounts have Required Minimum Distributions (RMDs) that start at age 73, except that employer plans (other than a Solo 401k) waive RMDs while you are still working. Roth accounts have no RMDs.	While HSAs do not have RMDs like pre-tax accounts, in practice due to the poor estate planning behavior of HSAs, you are usually best-off spending your HSA over your lifetime so the lack of RMDs is not much of an advantage.
Inheritance	Spouses can inherit an HSA and treat it as their own, and can withdraw tax-free based on their own medical expenses and those of their deceased spouse for which they have receipts. If left to a non-spouse, the entire HSA becomes taxable income in a single year, and the right to withdraw tax-free based on any past medical expenses is lost.	Spouses are generally allowed to treat inherited retirement accounts as their own. When left to a non-spouse, heirs must withdraw the account balance by the end of the tenth year after the owner’s death.	HSAs have far worse inheritance behavior than retirement accounts, because of the loss of right to withdraw tax-free for any of the owner’s medical expenses, and the concentrated taxable income in a single year. The poor inheritance behavior of HSAs drives the strategy for how they are best used.

HSA custodians and options

This list is not complete; please add others. Custodians are listed in alphabetical order.

Alliant Credit Union (HealthEquity)

Alliant Credit Union has no fees to open the account, no monthly or management fees, no transaction fees, free checks, free VISA debit card, no minimums, no fees to close the account. Alliant is ideal for a "cash" HSA to pay ongoing medical expenses or a starter HSA while you build towards an "investment" HSA. The HSA can be invested for a $5.95 monthly fee, with at least $1000 remaining in the cash account. Options include several Vanguard funds.

Note: Starting October 5, 2017, Alliant's HSA will be transitioned to HealthEquity. See this Bogleheads forum topic: "Alliant Credit Union no longer offering HSAs as of 11/9" and Alliant HSAs now administered by HealthEquity.

BenefitWallet

As of April 2024, BenefitWallet HSAs have been transitioned to HealthEquity.

Discovery Benefits (WEX)

The Discovery Benefits (Wex) HSA is only offered through employer plans.

Terms and fees may vary from one company to another, so be sure to verify this information for your own employer. To view the fee schedule, log in to your account, then click the "Get Help" link which takes you into a help site. From there, in the search function search for "fee". You should see a search result for "Article ID: PROD-2175 | Health Savings Account (HSA) custodial management fee FAQ" which explains the general fees.

For at least one Discovery Benefits HSA member, the "The custodial management fee is a flat fee of 25 basis points per year that is assessed quarterly. This equates to 0.0625% each quarter on any dollars currently invested in mutual funds... The HealthcareBank interest-bearing account is excluded from this fee." There are no low-balance fees in the savings account, or other fees. As noted, the fee schedule may vary from one company to another, depending on the terms negotiated between each company and Discovery Benefits.

If your HSA balance is low, then the fees are lower than many employer-based HSAs that charge a flat monthly fee. But since the fee is assessed as a percentage on your balance, then the higher your balance, the greater your fees. For this reason, if you wish to avoid these fees, it would be advisable to perform an annual HSA transfer or rollover to a no-fee HSA.

Discovery Benefits Investment Platform

The investing platform is available for any HSA balance over $1,000. You can set up automated investing so that any balance over the minimum is automatically invested. The platform contains multiple Vanguard index funds in the institutional share class, as well as Target Retirement date funds.

See also: Bogleheads forum topic: "Discovery Benefits (Wex) HSA - fees?". 31 July 2020.

Elements Financial (Eli Lilly Federal Credit Union)

Formerly known as Eli Lilly Federal Credit Union, Elements Financial has no setup fees. A maintenance fee of $4/month applies for balances below $2,500. Access to investments through DriveWealth is available only if your account balance at time of enrollment is at least $2,500.

Fidelity

Fidelity offers HSAs for employers and, as of November 2018, individuals. Individual HSAs have no account opening or transaction fees. In a favorable review of the Fidelity HSA's features, the The Finance Buff wrote: "No other HSA provider comes close to what Fidelity offers."

Health Equity

Health Equity Includes many Vanguard index funds, along with a annual 0.396% fee on the balance (0.033% per month times 12 months).

HSA Bank

HSA Bank now has its own automatic investments with many different mutual funds and ETFs available. There is a fee of 0.10% unless $7500 is kept in cash in the account or your employer has an arrangement which waives the fee.

Lively

Lively offers a Charles Schwab (formerly TD Ameritrade) brokerage account which offers commission-free trades on over 100 ETFs (excluding Vanguard). There is no fee to invest (beginning on January 1, 2019); prior to 2019, there was a $2.50 monthly fee but no minimum cash balance.

Optum Bank

Optum Bank Offers a suite of some 20 investment options, including Admiral shares of Vanguard's 500, mid-cap, and small-cap indexes. Monthly fee but no asset-based fee. Minimum $2,000 cash in order to invest, and you cannot directly spend investment funds.

Saturna Capital

Saturna Capital offers a stand-alone brokerage account through Pershing. You do not need a separate bank account with the HSA. There is no monthly maintenance fee. Vanguard and Fidelity Spartan funds are available for $14.95 per trade. Saturna does not offer checks or HSA credit cards. Saturna Capital's brokerage account has a $10 surcharge for Vanguard funds, as well as other fund families. The list can be found here: FundVest Focus Fund Families

SelectAccount

SelectAccount offers two levels of investment options. Once a minimum of $1,000 in an HSA savings account is achieved, you can open a basic investment account. Vanguard and Fidelity funds are among the choices in the HSA Investment Options. Account balances above $10,000 may utilize a self-directed brokerage account with Charles Schwab. (You must keep at least $1,000 in the base balance of your HSA account.) Both investment options impose an $18/year management fee. Schwab's standard brokerage commission schedule applies to transactions in the self-directed brokerage account.

The Sterling HSA

The Sterling HSA offers full-service medical record keeping with the Standard Plan, and the ability to use any brokerage account which is willing to open an account in the name of "Sterling HSA for The Benefit of (account holder)"when using the eSavings Plan. Sterling HSA Fee Schedule (there is an additional $16 annual fee for using their brokerage). Vanguard will not setup an account in accordance with Sterling HSA specifications.

WageWorks

WageWorks is a an employee benefits system that includes an HSA. Unlike Fidelity, Lively and many other HSA custodians, an individual HSA holder cannot enroll in WageWorks independently of their job, only through their employer.

A WageWorks HSA has a low-interest FDIC-insured savings account and an optional separate investment account on the BNY Mellon platform for HSA investing. In order to invest, you must maintain at least $1,000 in the savings account, with any balance above that available for optional investing.

WageWorks HSA Fees

Depending on the specific terms of your plan, you might pay a $2.00 monthly fee if the balance in the savings account is under $5,000; some employers may pay all or part of this fee for their employees. There are no investment trading fees or fees to use the investment platform, beyond standard mutual fund expense ratios. WageWorks also charges an additional $3.95 monthly fee for account holders who are no longer employed by their employers; as such, an individual who is enrolled in a WageWorks HSA and who leaves their employer should transfer out of WageWorks to a different custodian and close their WageWorks HSA. Additionally, there is a $16.00 transfer of asset (TOA) to another custodian fee.

WageWorks HSA Investing

In the investment platform, there are approximately 35 mutual funds in the following asset classes: Large Cap US Equity, Small and Mid-Cap US Equity, International Equity, Fixed Income, and All-in-One (target date and two Vanguard LifeStrategy funds).

Of interest to Boglehead investors are the following Vanguard index funds, which are the only index funds in the platform:

• Vanguard 500 Index Admiral (VFIAX)
• Vanguard Small Cap Index Admiral (VSMAX)
• Vanguard Developed Markets Index Admiral (VTMGX)
• Vanguard Emerging Markets Index Admiral (VEMAX)
• Vanguard Short Term Investment Grade (VFSTX)
• Vanguard Long-Term Bond Index Investor (VBLTX)
• Vanguard LifeStrategy Moderate Growth Investor (VSMGX)
• Vanguard LifeStrategy Conservative Growth Investor (VSCGX)

Note that only the two listed Vanguard LifeStrategy Funds are included; Vanguard has two other LifeStrategy funds (Income and Growth) but they are not available in WageWorks. The other WageWorks funds are actively managed funds.

A WageWorks account holder may configure their account to automatically invest new contributions into designated funds, for hands-off account management.

See also

• Flexible spending arrangement (Flexible spending account)
• High deductible health plan

Further reading

• Paul Fronstin, Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account Balances, and Rollovers, 2006-2009, (June 1, 2010). EBRI Issue Brief No. 343, June 2010. Available at SSRN.
• Paul Fronstin, Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account Balances, and Rollovers, 2006-2011, (January 2012). EBRI Issue Brief, No. 367, January 2012. Available at SSRN.
• Paul Fronstin, Employer and Worker Contributions to Account-Based Health Plans, 2006-2010, (March 1, 2011). EBRI Notes, Vol. 32, No. 3, March 2011. Available at SSRN.
• Paul Fronstin, Employer and Worker Contributions to Health Reimbursement Arrangements and Health Savings Accounts, 2006-2013 (February 2014). EBRI Notes, Vol. 35, No. 2 (February 2014). Available at SSRN.
• Paul Fronstin, Dallas L. Salisbury, and Jack VanDerhei, Savings Needed for Health Expenses in Retirement: An Examination of Persons Ages 55 and 65 in 2009, (June 2009). EBRI Notes, Vol. 30, No. 6, June 2009. Available at SSRN.

External links

• Health savings account, from Wikipedia
• HSAs and HRAs See Growth Over Four-Year Span, by EBRI.org
• Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account Balances, and Rollovers, 2006–2014, by EBRI.org
• The Complete Consumer's Guide to HSAs, by HSA for America
• HSA for America Maximize your HSA Newsletter
• Health Savings Account Contribution Limits for married couples according to type of coverage, by SunTrust
• Health Savings Account Landscape, a comparison of ten major HSA providers, from Morningstar
• White Coat Investor's comparison of the top HSA plans for investors

IRS and Treasury

• IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
• IRS Publication 502, Medical and Dental Expenses (HSA-qualified expense list)
• IRS Notice 2004-2 Health Savings Accounts (HSAs)
• IRS Notice 2004-50 Health Savings Accounts: Additional Q's and A's
• US Treasury: Health Savings Accounts (HSAs)

Forum discussions

• Bogleheads forum topic: "Review of Saturna Brokerage HSA". March 18, 2014
• Bogleheads forum topic: "Proposed update to Health Savings Account wiki page". June 22, 2024

State income tax

This list is not complete, please add info for other states.

• Instructions for filling out your CA state tax return if you have an HSA

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