The HSA or Health Savings Account is a special type of savings with tax breaks that helps you pay for medical expenses with no exit costs when you have a high tax plan or HDHP. Because HDHPs often cost less than traditional health insurance, people can theoretically use premium savings to fund their health savings account tax exemptions. In addition to being a smart way to pay for medical expenses, such as deductibles, copays, and coinsurance, HSAs are increasingly being used as part of a retirement planning strategy. However, because of the tax benefits, there are many rules about who is allowed to start an HSA. Usually, they can contribute money to the health savings account, and what that money can be used for. If you do not follow the rules, you will lose your tax benefits and owe additional penalties.

(health savings account - HSA)
(health savings account – HSA)

How does the health savings account reduce taxes?

If you manage your HSA properly and follow all IRS rules, your money is:

  • there are no taxes when you earn it and put it in the HSA,
  • no taxes as it grows,
  • when you take them out of the HSA to pay for medical expenses (no tax).

Here’s how it works. The money you put into your health savings account can be tax-deductible. If your employer contributes to your HSA, that money doesn’t count as income, so you don’t pay taxes on it.

Interest and investment earnings in your HSA grow tax-deductible as they do in the IRA. Because you don’t pay income tax each year on interest, you keep more interest in the account. Furthermore, accounts grow faster.

If you take money from your health savings account to pay for qualified medical expenses, you do not have to pay income tax. However, if you take money from the health savings account but don’t use it for medical expenses, you’ll have to pay income tax and a 20 percent penalty.

After you turn 65, the rules are a little different. If you are on Medicare, you can no longer contribute to your HSA. However, you can still use the money you have saved in the HSA. Unlike 65 years ago, you can spend your HSA money on anything you want and you won’t have a 20% penalty. However, you will have to pay income tax on HSA withdrawals that are not used for medical expenses. If you take money from the HSA and use it for qualified medical expenses, you are not paying regular income taxes; it is completely tax-free.

Who is qualified for HSA?

You are eligible to start and contribute to the HSA if you meet all of the following requirements:

  1. We are covered by qualified HDHP (that is, a high-level health care plan that qualifies for deductible and out-of-pocket requirements established by the IRS for HSA-qualified plans that cover nothing but preventive care before the refusal is met).
  2. You do not have additional, more traditional insurance than health insurance.
  3. You’re not on Medicare.
  4. No one else can claim that you are dependent on a tax return.
  5. You have no general purpose

How does money get into the HSA?

You can contribute money to your health savings account yourself, your employer can contribute money to your HSA. Also, another person can contribute money to your HSA. However, the total annual contributions to your HSA are limited. The limits change each year and vary depending on your age and whether you only have HDHP coverage or family coverage. If your HDHP health insurance is covered through your job, your employer can make contributions to your HSA.

In addition, many employers set salary deductions so you can easily contribute a portion of each salary directly to your HSA. When the HSA contributes in this way, you avoid both income tax and payroll tax (FICA). While non-payroll contributions to the HSA are only deductible for income tax.

If your health insurance is not over your job, your employer is unlikely to be involved. In this case, most people automatically contribute monthly to their HSA. However, your financial institution will also allow you to make a lump-sum contribution to your HSA if you want that approach.

Your HSA funds should be with an HSA custodian, who can be a bank, credit union, or brokerage house. Being able to have your money in a brokerage account means you can invest in the stock market if you choose that option, earning investment rather than simple interest (investments are at risk, which is why some people prefer lower returns – and lower risk) that go with keeping HSA funds in bank or credit union).

Is health savings account another retirement plan?

Health Savings Accounts (HSAs) are unlikely to be envisaged as another retirement plan. However, the HSA can be used to help you achieve your retirement goals. Although the HSA is primarily a tool for earning tax relief while paying health expenses. Healthier individuals may find that the health savings account also allows for more savings for retirement.

The HSA can help you achieve your retirement planning goals in two basic ways. First, all medical expenses incurred (before or after retirement) may be paid in cash (and any earnings) in your HSA. No tax is paid on such payments. You receive a tax-free tax that you contribute to the HSA which is ultimately used for medical expenses.

Another great potential benefit of HSA happens if you are lucky enough to be relatively healthy. Because health savings account balances are executed each year, you can collect quite a lot of money in your account. If you collect more money in your HSA than you need for retired medical expenses, you can withdraw your HSA money for any reason after 65 years, without punishment. After such a distribution, you will only need to pay ordinary income tax, as you would with a regular IRA distribution. Effectively, you would benefit from a significantly higher contribution limit for the IRA than earning periodic HSA contributions.

The difference between HSA and FSA


An FSA is a flexible spending account that is a type of health account or health insurance plan with non-taxable benefits for the account holder. Money deposited in the FSA can be used for medical expenses that are not covered by other insurances. A person can participate in several types of FSA, but funds from one FSA cannot be transferred to another. The coverage of any FSA is limited to that year only and funds are not carried over to the following year. Debit cards were introduced to facilitate spending through the FSA.

US Health Savings illustration
( FSA is usually used for medical spending expenses)


The Health Savings Account and the Flexible Spending Account are two savings instruments available to U.S. citizens. These accounts help Americans set aside money for future use in medical emergencies. Both have their different features and also have rules for using money. Both accounts are tax credit accounts with deferred tax to the account holder. Money going to these accounts is not taxable resulting in significant savings for the account holder.

Both of them are intended for use for medical expenses, but there are differences in related fees, withdrawal methods, and expiration dates. The first and most important difference between the two is that FSA is a COST account. While HSA is a SAVINGS account. Anything you contribute to the FSA must be spent in that year only as long as the funds entering the HAS can be used at any time. Even after the end of the year.

You can have FSA even if you have health savings account or not. You can use FSA funds for both medical and child care, while HSA funds are intended only for medical expenses. The funds you invest in HAS can be invested in stocks, bonds, and securities if you don’t use them just like the IRA. The amount of FSA has to be used only in that year, so there is no talk of investing it. Once you turn 65 and have funds on your HSA, you can cash them in and invest in your IRA.

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