The Basics of Health Savings Accounts

Dan Galli, CFP |

Health Savings Accounts (HSAs) offer a unique opportunity for both increased savings and tax reduction. Currently HSAs are the only type of account that provide a tax deduction for contributions and no taxation when the funds are used to pay for qualified medical expenses.


Contributions can be made to an HSA only in a year during which the taxpayer is covered by a qualified high deductible health plan (HDHP). 

The benefits to considering an HDHP include lower premiums due to the high deductible. A plan with a high deductible might be right for someone who is healthy and rarely gets sick or injured, and can afford to pay the deductible up front in the event of an unexpected medical expense.

For the purpose of HSAs, a high deductible health plan is considered to be a plan with a deductible of more than $1,400 for an individual plan and more than $2,800 for a family plan.


In HSAs all contributions, up to annual limits, are made pre-tax. Contributions can be made through payroll deduction via an employer or by direct payments to the HSA account.

The contribution limit for HSAs for 2021 is $3,600 for those with individual health plans, and $7,200 for those with family plans. Taxpayers age 55 or older can contribute an additional $1,000.

The deadline for making contributions is April 15th of the following year. 

Some employers will contribute to their employees’ HSAs as a benefit. If this is the case, the employer contribution counts toward the annual contribution limit.


HSAs can be opened at most financial institutions.

Once money is added to an HSA, it can continue to be held in cash or invested. Any growth or income inside of the account is not subject to taxes.


Withdrawals can be taken at any time, including in retirement.

Qualified withdrawals: As long as withdrawals are used to pay for qualified medical expenses, they will be income tax free. Medicare premiums, long term care insurance premiums, and COBRA premiums are considered qualified expenses. Qualified medical expenses are listed in IRS Publication 502.

Non-qualified withdrawals: If the withdrawals are not used for qualified medical expenses, they will be taxable. Health insurance premiums (typically via an employer) are not qualified expenses. Additionally, non-qualified/taxable withdrawals made prior to age 65 will also incur a 20% penalty.

Withdrawals do not count as income towards the calculation for the taxation of Social Security benefits, or toward the formula that determines higher premiums for Medicare Part B.


Unlike other tax-favored accounts, HSAs are triple tax-free:

  • The taxpayer receives a deduction for the contribution
  • The funds inside the HSA grow tax-free
  • Qualified withdrawals are tax-free

Note that the tax deduction for the initial contribution has no income limits. This makes HSAs particularly attractive for individuals and couples with high income, for whom many other tax deductions are phased out.

Overall, health savings accounts are becoming an increasingly popular tool to reduce taxes, set aside funds for health care costs, and as an employee benefit.

Additional information about Health Savings Account can be found in IRS Publication 969.