How Does an HSA Work?
With an HSA, you get access to more of your taxable income. For example, if you’re in a 20% tax bracket, you get $100 to spend in your HSA account that would only be $80 in your regular, post-taxed account.
Then, your purchase of a $100 medical device will cost you exactly $100—no sales tax!
So, most people spend about 30% less on average on health expenses using their HSA than they would with money directly from their bank account.
Benefits of an HSA
In addition to the income and sales tax exemption, if you choose to invest the money in your HSA, the income from the investment is tax free as well.
The money in your HSA is yours. It rolls over from year to year, and stays with you through any changes in employment or insurance plans. If you enroll in a non-HDHP or lose insurance, though you can still use the money in your account for qualified expenses, you cannot add money to the account until you are enrolled in a new qualifying HDHP.
Note: With a FSA (or Flexible Spending Account), the money in your account does not roll over year to year.
How to Open an HSA
To open your HSA, you must already be enrolled in a qualifying HDHP.
Many banks offer HSA accounts, so we recommend doing some research into what will work best for you in terms of fees, interest rates, investment options, convenience, and customer service.
How to Use Your HSA
HSA funds can be used for anything deemed a qualifying medical expense. A full list can be found on the IRS website, but you can usually use it to pay for co-pays, insurance premiums, prescriptions, or medical supplies (including things like tylenol, contact lenses, and tampons).
Purchases can be made with your HSA card, or you can pay out of pocket and reimburse yourself with HSA funds. In either case, you’ll want to keep track of your receipts for purchases and medical bills.
Contribution Limits
The maximum amount you can contribute to your HSA for 2025 is $4,300 for individuals or $8,550 for families. People aged 55+ can add an additional $1,000 per year as a “catch-up” payment.
You can set a regular contribution amount from your income, which can be changed at any point.
You can withdraw money from your HSA at any point. Withdrawals for non-medical expenses will be subject to income tax. If you are under 65, there is also a 20% penalty tax for non-medical withdrawals.
HSA Strategies
In a best case scenario, we would all have the money to contribute the maximum yearly to our HSA, invest it, and save that money for future health expenses.
If that’s not your situation though, your next-best bet will be to contribute the amount of money you think you’ll likely spend on out-of-pocket healthcare in the year. This will allow you to cover those costs while spending less money than you would straight from your bank account.
Another strategy is to contribute to your HSA the difference between what you would have spent on a higher insurance premium. If a traditional (non-HDHP) route would have had you paying $500 per month, and instead you went with the $200 per month HDHP, contribute the $300 difference to your HSA each month. Hopefully, you’ll be able to build it into a good bit of savings, but if you have a medical need, you’ll have the money for it.
What Now?
Getting started with an HSA can help you stay on top of your health and finances. For more tips on how to get started, check out the IRS’ resources or some of the easy to use calculators from HSA Bank.
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