personal finance |  MARCH 16, 2022

How to Best Use Your Health Savings Account

Investing in an HSA has great tax benefits—if the insurance coverage makes sense.


Key Insights

  • Health savings accounts (HSAs) are rightfully viewed by financial planners as a powerful retirement savings tool with unmatched tax benefits—if used properly.

  • Savers should consider a range of short- and long-term strategies with HSAs—and avoid situations where they can be suboptimal or even harmful.

  • Eligibility for an HSA requires a high-deductible health plan, so individuals need to evaluate health coverage factors before seeking the tax benefits of an HSA.

Roger Young, CFP®

Thought Leadership Director

Since 2004, individuals enrolled in high-deductible health plans (HDHPs) have been able to fund health savings accounts (HSAs). A Mercer survey showed that 40% of employees nationally enrolled in HSA-eligible health plans in 2021.1 As more employers offer these plans, HSA usage has grown steadily to over 31 million accounts and $93 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.

(Fig. 1) Key HSA facts (2022)3

Key HSA facts 2022
   Individual Family
Eligibility Under 65 and enrolled in HDHP
Minimum deductible for HDHP $1,400 $2,800
Maximum out-of-pocket expense for HDHP $7,050 $14,100
HSA annual contribution limits $3,650 $7,300
HSA per-person catch-up contribution limit (age 55) $1,000 $1,000

See Figure 1 for current IRS parameters on HDHPs and HSAs.

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. Figure 2 compares HSAs with other tax-advantaged savings vehicles.

A key consideration in the evaluation of HSAs is the definition of a “qualified medical expense.” In general, expenses that would qualify for a federal income tax deduction are considered qualified. (As you might expect, you can’t double-dip and count them both as qualified for your HSA and as itemized deductions.) Some insurance premiums are qualified: Medicare, long-term care, COBRA, and coverage while you’re unemployed. However, one significant medical premium is not qualified: Medicare supplement insurance, also referred to as Medigap. Hybrid life insurance/long-term care policies are usually considered life insurance and, therefore, aren’t qualified.

A helpful feature of HSAs is that qualified medical expenses from prior years can be used to take qualified distributions. The expenses need to have occurred after you established the HSA and cannot have been otherwise reimbursed or used for itemized deductions.4 This feature adds to the flexibility of HSAs if you can keep good documentation of medical expenses and tax returns (potentially for a much longer time than you would ordinarily keep those records).

1Mercer National Survey of Employer-Sponsored Health Plans, 2021.
22021 Midyear Devenir HSA Research Report, September 6, 2021.
3IRS Revenue Procedure 2021-25.
4Internal Revenue Bulletin 2004-33 Notice 2004-50, Health Savings Accounts—Additional Qs&As, Answer 39, August 16, 2004.

Important Information

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide fiduciary recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Please consult your tax or financial professional regarding questions specific to your situation.

The views contained herein are those of the authors as of February 2022 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk. All charts and tables are shown for illustrative purposes only.

View investment professional background on FINRA's BrokerCheck.



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