What is an HSA?

An HSA (not to be confused with a HYSA, they're totally different which is ridiculous) is a Health Savings Account. You would most likely know if you had one, but even if you don't, it's useful to know what it is and who is eligible to have one.

You are eligible for an HSA if you...

• Are over 18

  • Have health insurance where... - Deductible > $1,500 (for an individual person in 2023) - Out of pocket max < $7,500 (for an individual person in 2023)

• Are not claimed by anyone else as a dependent on their taxes

• Are not on Medicare

If you meet those requirements, you can have an HSA and contribute up to the annual maximum of $3,850 (as of 2023). This account can't be opened through a broker like Fidelity. You'll have to open an account with an organization that specifically offers health savings accounts. If your health insurance is through your job, they'll likely have an HSA provider you have to use. For example, my company provides HSAs through healthequity.com.

If you aren't opening the HSA through your employer, you can choose a provider. Use this site to compare options and pick one.

HSAs are pretty fantastic, and here's why.

• You don't pay taxes on growth, contributions, or withdrawals. This is even better than IRAs and 401ks. NO TAXES!!!

• The money rolls over from year to year, without limit. You can just keep growing your wealth in an HSA.

• You can use the money for any medical expenses except premiums (what you pay for your actual health insurance) for yourself, your spouse, and your dependents. This includes your deductible, coinsurance, prescriptions, dentist and eye doctor visits, most over-the-counter medications, dentures, first aid kits, vaccines, anything related to having/creating children, orthodontia, therapy, and so on and so forth.

• After you turn 65, you can use the money for whatever you want! You'll just have to pay regular taxes. The tax benefits are still huge, even if you end up using it to go on a cruise when you're 70.

Let me walk you through a normal case scenario:

Your company tells you that you have an HSA. You go to the link they give you and open an account. Your company lets you set up an automatic contribution from your paycheck -- for example, I send $100 to my HSA every paycheck, so I never even see that money in my checking account.

You can log into the HSA provider's website to see how much money you have in there, to contribute more money, or to pay an expense using that money. You can also choose to pay a bill with your own money (ie, your checking account) and then reimburse yourself from your HSA. Or even simpler, your HSA will give you a debit card that you can use to pay for medical expenses (for example, when you're out at the pharmacy).

Here's what my menu looks like:

If you're pretty confident you won't actually use the money in your HSA or won't use all of it, you can also invest that money in the stock market (like you do with the money in your 401(k) or Roth IRA). Again, this money won't be taxed -- not the contributions, or the money you spend, or the gains.

I personally plan to save up $1,000 in my HSA for immediate use, and then invest any money beyond that within the HSA. For example, if my HSA has $1,500, I'll invest $500 and keep $1,000 available for expenses. I only have a few hundred dollars in there so far, so I haven't invested yet.

In case of emergency, if I really need the money for something non-medical before age 65, I can take the money out but will have to pay taxes and a 20% penalty. (Note: The penalty is only 10% for taking money out of your IRA or 401(k) early, so those are a better option.)

TL;DR: A Health Savings Account is an added complication in terms of managing your money. I know you already have a checking account, a credit card (or 2 or 3), maybe a savings account, an IRA, a 401(k).... Too many things! But an HSA really is a super great way to amount wealth. You can contribute as little or much as you want up to $3,850/year and your money will GROOOOOOOW! It's flexible, easy to access, and another way to pay less money (legally) to the government.

Stay healthy, everyone!