What is a Health Savings Account? Why It’s Better than a Flex Savings Account.

Health Savings Accounts (HSAs) are triple tax free when used for qualified medical expenses. 

What does that mean?

Your contributions are tax free when taken from payroll, or you receive a deduction if you contribute outside of your paychecks.

The money can earn interest and be invested and no taxes are owed on interest, dividends and capital gains.

Withdrawals when used for qualified healthcare expenses are tax free.

The benefit?

Your healthcare expenses when taken from an HSA effectively come at a discounted rate (the taxes you didn’t have to pay). That discount could be as high as 37% (the top Federal income tax bracket) plus whatever your state income tax rate is. Your discount will depend on your income tax bracket.

Why is it better than a Flex Savings Account?

Unlike FSAs, HSAs are not use it or lose it. If you don’t incur medical expenses or don’t use your HSA to pay for it (more on that later) you get to keep the funds invested.

How much can be contributed?

Families: $8,750 annually plus an additional $1,000 if over age 55

Individuals: $4,400

2026 numbers

Can anyone open an HSA?

No. HSA’s are tied to high deductible health insurance plans, minimum of $3,400 for families and $1,700 for individuals.

You cannot be on Medicare and contribute to an HSA.

Who is an HSA right for?

If you already have a high deductible health plan, an HSA is a great tool. It is the only account where your hard earned dollars can avoid taxes at every level, be invested, and don’t need to be used in a calendar year.

What about high deductible plans?

Generally, because the out of pocket deductible is higher monthly premiums are lower. The all-in cost for relatively healthy people can be lower with a high deductible plan and the HSA provides cash in the event you need to pay your deductible. 

Tax savings are one thing, but most important is getting the health care that best suits your family, sometimes that means paying more, sometimes that means not paying for things you don’t need.

What qualifies for a qualified medical expense for HSA purposes?

Quite a lot. And for those interested in getting more personalized and dedicated primary care, Direct Primary Care memberships are now qualified.

Full lists can be found here: https://www.healthequity.com/hsa-qme

Fun facts about HSAs:

You can save your medical receipts that you pay out of pocket and reimburse yourself at any time for anything. Example: let’s say you have accumulated $10,000 in medical expenses and have the receipts, but you paid out of pocket for them so your HSA funds could stay invested. Fast forward 10 years from now you could submit your receipts and make a $10,000 tax free withdrawal to take a vacation.

Have an old retirement account?

The IRS allows for a 1 time funding of an HSA (up to the annual limits) from an IRA, assuming you meet all other requirements to open and contribute to an HSA. The benefit? What was pre-tax money that some day would be taxed from an IRA can now become tax free withdrawals when used for health expenses.

Written by Nathan Tomkiewicz, CFP®

The information in this blog is the opinion of Nathan Tomkiewicz and does not reflect the views of any other person or entity unless specified. The information provided is believed to be  reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Tomkiewicz Wealth Management, LLC, an investment adviser registered with the State of New York and Massachusetts.