Each year, thousands of people face the same confusing question: Which health insurance plan should I choose?
For many, the decision feels overwhelming, so they default to the plan with the lowest out-of-pocket costs. While that may seem logical, it’s not always the best option—especially if you only visit the doctor for routine checkups. One major advantage of a High Deductible Health Plan (HDHP) is eligibility for a Health Savings Account (HSA), a powerful savings tool with long-term financial benefits.
What Is an HSA?
A Health Savings Account (HSA) is a special savings account available to individuals enrolled in a High Deductible Health Plan. It allows you to set aside money specifically for healthcare expenses.
The key benefit: HSA contributions are tax-free when used for qualified medical expenses. Because HDHPs come with higher deductibles, the HSA is designed to help offset those costs. If funded consistently, an HSA can significantly reduce—or even eliminate—your out-of-pocket medical expenses.
How Is an HSA Different From an FSA?
HSAs are often confused with Flexible Spending Accounts (FSAs), but there’s one major difference:
- HSA funds roll over year after year
- FSA funds generally expire if not used within the plan year
This rollover feature makes HSAs far more flexible and valuable for long-term planning.
Benefits of an HSA
Tax Advantages
HSAs offer a rare triple tax advantage:
- Contributions are made with pre-tax dollars
- Funds grow tax-free
- Withdrawals for qualified medical expenses are tax-free
As of 2019, contribution limits are:
- $3,500 for individuals
- $7,000 for families
If you’re age 55 or older, you can contribute an additional $1,000 per year, bringing totals to $4,500 (individual) and $9,000 (family). That’s a substantial amount of income shielded from taxes.
Retirement Benefits
Once you reach age 65, your HSA becomes even more flexible. You can withdraw funds for any purpose, similar to a Traditional IRA. Withdrawals used for non-medical expenses will be taxed as ordinary income—but no penalties apply.
This makes HSAs a valuable supplemental retirement savings vehicle.
Investing Your HSA Funds
Many HSA providers allow you to invest your balance once it reaches a certain threshold (often around $2,000). You can invest in mutual funds or stocks, potentially growing your balance much faster than with standard interest alone.
That said, investing comes with risk. It’s wise to keep at least your annual deductible—or your plan’s out-of-pocket maximum—in cash. If your balance grows beyond that (for example, above $10,000), investing a portion may make sense.
Drawbacks of an HSA
Requires a High Deductible Health Plan
The biggest downside is that an HSA must be paired with an HDHP. If you frequently visit doctors or have ongoing medical expenses, a high deductible plan may cost you more overall.
Contributions Are Optional—but Necessary
HSAs only work if you actively contribute to them. If you’re unlikely to fund the account consistently, you may not fully benefit from having one. In that case, another health plan option may be a better fit.
Potential Fees
HSAs function like bank accounts and may include fees for maintenance, debit cards, or paper statements. Some providers waive fees if you maintain a minimum balance, so it’s worth shopping around.
Summary
Choosing an HSA is similar to self-insuring your medical expenses—with powerful tax benefits and the protection of an HDHP. When used correctly, an HSA can support both your current healthcare needs and your long-term financial goals.
If you decide to enroll, aim to fund your HSA aggressively at first. Ideally, your balance should at least cover your plan’s deductible so that even in a worst-case medical scenario, your out-of-pocket costs are fully covered.
