What Is An HSA And Why Should I Participate?

An HSA is a type of tax-deferred account designed to help you save for your health care costs for current and future years. An HSA essentially works like an IRA for medical expenses. However, it differs from a Flexible Spending Account (FSA) in that money not spent in a calendar year can remain in the account to be used in future years – or retirement.

HSAs are only available to you if you have coverage through a qualifying high-deductible major medical health plan, referred to as an HDHP. If you can participate in an HSA, you should know these facts:

  • You can fund HSAs with pre-tax income up to $3,600 for an individual and $7,200 for a family in 2021. There is an additional catch-up contribution of $1,000 for those ages 55 and older. You can withdraw the money tax-free for medical care as well as prescription drugs.
  • You can also make contributions directly to an HSA via deposit for the prior tax year until the tax filing deadline (generally April 15th).
  • The minimum HDHP deductible for 2021 is $1,400 for an individual and $2,800 for family coverage. You may not contribute to an HSA if a low deductible insurance policy covers you.
  • The amount of your HSA contribution directly reduces your taxable income. This is done so that you will pay tax on less income overall.
  • Any money not spent in the year contributed grows tax-deferred in the investment account you choose from those available under your plan.
  • If withdrawn for non-medical purposes before age 65, the money will be taxed as ordinary income and will incur a 20% penalty as well. However, once you turn 65, you may withdraw the funds for any non-medical purpose without this penalty.
  • If you change employers, you can transfer HSA accounts, similar to a rollover from one 401(k) to another.


1. Consider participating in an HSA if you want to choose your doctor and control your medical costs.

2. Be aware that an HSA with a high-deductible health plan may not be the best option for those who have ongoing medical conditions and treatments.

3. If you plan to defer much of your HSA balance until retirement, make sure to invest for the long term among the investment options available to you.

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