(NewsNation) — It’s open enrollment season and that means millions of Americans are deciding on health insurance. For many, choosing a plan that allows for a tax-advantaged health savings account (HSA) could be a good option.
A health savings account (HSA) lets those with a high-deductible health plan set pre-tax money aside to pay for medical expenses, from Band-Aids and Tylenol to doctor office visits.
As far as savings accounts go, HSAs have some of the best tax benefits, offering a triple tax advantage:
- Tax-free contributions: You can contribute pre-tax dollars via payroll deductions.
- Tax-free growth: Earnings from interest or investments are not taxed.
- Tax-free withdrawals: The money you take out is tax-free as long as it’s used for qualified medical expenses.
HSAs have benefits beyond taxes as well.
Many employers match HSA contributions, similar to a 401(k) match, essentially “free money.” And if you end up changing jobs, your HSA goes with you.
Unlike other health care spending accounts, like a flexible spending account (FSA), there is no “use it or lose it” requirement with HSAs. That means the money you save today can be used years, or even decades later.
Here’s what to know when deciding whether an HSA is a good option for you.
Who does an HSA make sense for?
HSAs are only available to those with high deductible health plans — which typically have lower monthly premiums but require you to pay more health care costs before insurance kicks in.
For 2025, the Internal Revenue Service (IRS) defines a high-deductible health plan as any plan with an annual deductible of at least $1,650 for an individual or $3,300 for a family.
Because you initially pay more out of pocket than a traditional insurance plan, high-deductible plans are generally better for people who are healthy and don’t need to see a doctor often.
You don’t have to sign up for an HSA if you’re on a high-deductible plan, but it can be a good idea, especially for someone in their 20s and 30s who’s likely to have lower health care costs. Younger adults also have more time for their money to grow tax-free in the account.
On the other hand, those with chronic medical conditions may be better off with a traditional health plan that wouldn’t qualify for an HSA.
High-deductible health plans have become more popular over the past decade but research suggests many people aren’t taking advantage of HSAs.
A 2020 study found that 1 in 3 adults enrolled in a high-deductible health plan did not have an HSA and most who did have one hadn’t contributed money in over a year.
How do you sign up for an HSA?
After you enroll in an HSA-eligible health plan you’ll need to open an HSA separately.
First, check with your employer to see if they offer an HSA program. If they do, it’s often easiest to enroll through the employer-sponsored HSA and they may even match the funds you put in.
Remember, even if an HSA is offered through your employer’s benefits package, it’s still your money, even if you leave the company.
If your company doesn’t offer an HSA, you can set one up directly with a bank or other financial institution but it’s important to shop around because providers’ terms vary. Fidelity is a popular choice and offers HSAs with no account fees.
A few questions to keep in mind when choosing an HSA provider:
- Are there account fees?
- Is there a minimum balance requirement?
- What are the investment options?
- How easy is it to make withdrawals?
How do I maximize my HSA?
You can deposit cash directly into your HSA but to get the full tax benefit you’re better off having contributions deducted from your paycheck — that way you save on both federal income tax and FICA taxes.
Another way to maximize your HSA is by contributing the full limit each year. The HSA contribution limits for 2025 are $4,300 for self-only coverage and $8,550 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
Once your account hits a certain balance, usually at least $1,000, you can invest HSA dollars like you do with an individual retirement account — whether in stocks, mutual funds, ETFs or something else.
A lot of people treat their HSA like a retirement account — leaving it untouched for decades. That’s because once you turn 65 you can withdraw money from your HSA for any reason without penalty, though you will pay taxes if it’s not used for medical expenses.
Despite the upside, just 12% of accountholders invested their HSAs in assets other than cash in 2021, according to the nonprofit Employee Benefit Research Institute.
What can I buy with an HSA?
When you pull money out of your HSA it must go toward a qualifying medical expense otherwise you’ll pay federal income tax and a 20% tax penalty (the penalty goes away once you turn 65).
You can’t use your HSA funds for pizza or a new Xbox. Vacation also doesn’t count, even if it’s good for your health.
So what qualifies as a medical expense? There’s the obvious: doctor visits, prescription medications, over-the-counter treatments and personal protective equipment like face masks.
Other eligible items may be less obvious: sunscreen, massage guns and pimple patches to treat acne.
For some items, your doctor may need to provide a letter of medical necessity for it to qualify — like an air purifier.
Websites like HSAStore.com have a full list of products that are HSA-eligible.
Remember: you are responsible for using your HSA dollars on eligible items so keep receipts. The IRS may ask for proof if you ever get audited.
Also, you typically can’t use your HSA to pay health insurance premiums.
What’s the difference between an HSA and an FSA?
There are a few key differences between the health savings account (HSA) and another tax-advantaged account, the flexible spending account (FSA).
Like HSAs, FSAs allow you to put money aside pre-tax and can only be used for qualified medical expenses. However, FSAs are only available through your employer and don’t require a high-deductible plan.
Another difference is that FSA funds are generally “use it or lose it,” meaning when the new benefit year begins you may forfeit any leftover funds from the previous year. Because your company owns the account, if you leave your job you’ll lose your FSA funds.
Most importantly, FSAs do not let you invest, which means whatever money you put in is what you get.
So despite their name, FSAs are generally less flexible than HSAs.
Who is an FSA good for? NerdWallet puts it like this: “If you have predictable, ongoing medical expenses during the year, or regular over-the-counter spending, using pretax dollars for those costs lowers your bottom line.”