personal finance |  august 5, 2021

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®

Senior Financial Planner

Since 2004, individuals enrolled in high-deductible health plans (HDHPs) have been able to fund health savings accounts (HSAs). A Mercer survey showed that 83% of large employers (20,000 or more employees) offered HSA-eligible health plans in 2019.1 As more employers offer these plans, HSA usage has grown steadily to over 29 million accounts and $73 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 (2021)3

   Individual Family
Eligibility Under 65 and enrolled in HDHP
Minimum deductible for HDHP $1,400 $2,800
Maximum out-of-pocket expense for HDHP $7,000 $14,000
HSA annual contribution limits $3,600 $7,200
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 Article 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, 2019.
22020 Midyear Devenir HSA Research Report, September 1, 2020.
3IRS Revenue Procedure 2020-32.

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 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.

The views contained herein are those of the authors as of May 2021 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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