Personal Finance

Using Health Savings Accounts Wisely

March 13, 2019
Health savings accounts can be a powerful retirement savings tool with unmatched benefits if used properly.

Key Points

  • Health savings accounts (HSAs) are available to individuals enrolled in high-deductible health plans.
  • HSAs should not be tapped for emergencies as there is a 20% penalty on nonqualified withdrawals.
  • Investing in an HSA and using it for qualified medical expenses in retirement provides a triple tax benefit.
  • It is not ideal to leave a large HSA balance to someone other than your spouse.

Since 2004, individuals who enrolled in high-deductible health plans (HDHPs) have been able to fund HSAs. A Mercer survey showed that 80% of large employers (20,000 or more employees) offered HSA-eligible health plans in 2016.1 As more employers have offered these plans, HSA usage has grown steadily to over 22 million accounts and $45 billion in assets.2 We expect that HSAs will be a growing part of the health care landscape.

In an HDHP, the insured is responsible for a significant portion of health expenses up front before the insurance company pays. However, HDHPs must also include a limit on participants’ out-of-pocket expenses. Premiums on these plans are generally lower than more traditional, lower-deductible policies. See Figure 1 for current IRS parameters on HDHPs and HSAs.

(Fig. 1) Key HSA facts (2019)3
  Individual Family
Eligibility Under 65 and enrolled in HDHP
Minimum deductible for HDHP $1,350 $2,700
Maximum out-of-pocket expense for HDHP $6,750 $13,500
HSA annual contribution limits $3,500 $7,000
HSA per-person catch-up contribution limit (age 55) $1,000 $1,000

The HSA is structured with significant tax incentives to choose an HDHP and save or invest for health costs. Proponents of HSAs often refer to a “triple tax benefit”: tax deduction, tax-deferred growth, and tax-free qualified distributions. This essentially combines the benefits of Roth and pretax strategies in an individual retirement account (IRA). In addition, the funds can be used before retirement for qualified medical expenses without tax or penalty. If used before age 65 for other purposes, however, a 20% penalty is assessed.

Read our Full Study below to see how HSAs compare with other tax-advantaged savings vehicles as well as to learn more about key considerations, benefits, and best practices.

1Mercer National Survey of Employer-Sponsored Health Plans, 2016.
2Devenir Research 2017 Year-End HSA Market Statistics & Trends, February 22, 2018.
3IRS Revenue Procedure 2018-30.

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.

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