What is a HSA and Do I Need One?

Mar 1, 2022 | All Posts, Blog | 0 comments

“What is a HSA, and do I need one?” This is a question that many people ask as they make plans for health insurance and their financial futures. Read on to learn all about whether this decision may be beneficial for you.

What is a HSA?

A health savings account is like a personal savings account that is used to pay for healthcare expenses. The money deposited into this account is not taxed—a significant benefit of this health savings tool. The money in your HSA is controlled by you, not your employer. In order to qualify, you must be enrolled in a high-deductible health plan. Other requirements include not being enrolled in Medicare and not being claimed as a dependent on someone else’s tax return.

Benefits of HSAs

Having health expenses is pretty much a guarantee in everyone’s life. A HSA is a powerful and effective tool for saving toward these expenses. We highly recommend having a health savings account, as it is the only account for which you never have to pay taxes.

How does a HSA work?

Contributions to your HSA account can be made by you, your employer, or any individual who wants to contribute. These deposits are yours to withdraw at any time in order to be used for medical expenses that are not paid by your HDHP (high deductible health plan).

The funds are not available only to you, though. You can use the money in your HSA to pay for medical expenses incurred by your spouse or other family members as well.

At the end of each year, the unspent money in your HSA will roll over to the next year. In this way, the account continues to grow (tax-free!).

Until age 65, you can only use the funds in your HSA for medical expenses. If they are used for other expenses, they will incur a penalty. Once you reach the age of 65, though, there is no longer a penalty for withdrawing funds for non-medical expenses. However, income tax will be owed on the money you withdraw. As long as you keep the funds in the account to use for healthcare expenses, they will remain tax-free.

Is having a HSA worth it?

As we mentioned previously, a HSA is the only account for which you never have to pay taxes. In addition, you will almost certainly incur medical expenses throughout life. Therefore, if you have a HDHP and meet the other qualifications, we would certainly say that having a HSA is well worth it!

Is a HSA good preparation for retirement?

The HSA is a good vehicle for saving toward retirement healthcare expenses, but there is a limit of what is reasonable. Due to the inefficiency of passing it to a beneficiary and limitations on what qualifies for tax-free (and penalty-free) withdrawals from the HSA account, it should be treated as one leg of a stool in terms of retirement planning. HSA accounts, pre-tax accounts, Roth accounts, and taxable accounts all have their place. It usually works best to have a balanced approach between them.

Downsides of HSAs

HSAs have tons of benefits when used correctly. However, there are a few things you’ll need to consider in order to get the most advantages from your account.

Withdrawing funds for non-medical expenses before age 65 is something you will most likely want to avoid. This not only incurs income taxes, but also a 20% penalty.

Another point to keep in mind is that you should use the money in your HSA when needed rather than saving it. Passing it on to a non-spouse beneficiary is not a good idea, as the entire value is taxable in the year in which it is inherited. Do not save your HSA money for your beneficiaries. There are much better investment options for your loved ones.

Should I have a HSA?

If you qualify for a HSA, we recommend having one. Just be sure to use it for your medical expenses. Remember that a HSA is just one aspect of having a well-rounded plan for retirement.

Preparing for your financial future

Do you have questions about preparing for your financial future? Milestone Wealth Management is here to help. We want you to have a well-rounded plan for your retirement years. Contact us today and let’s talk!

Have more questions about healthcare? Check out our previous post, Answering Your Health Insurance Questions. 


This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situations above are made.

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