Health savings accounts (HSAs) are tax-advantaged accounts designed to help you pay for qualified medical expenses. Your contributions to an HSA can reduce your current taxable income and any earnings can grow tax-deferred while in the account. When your HSA money is used to pay qualified medical expenses, withdrawals are tax-free. These 3 reasons are why HSAs are considered "triple" tax-advantaged.1
To be eligible to open and contribute to an HSA, you must be enrolled in an HSA-eligible health plan (often called a high-deductible health plan or HDHP). There are 2 ways of opening an HSA, through your employer or on your own.
If you have an employer-sponsored HSA, money is contributed before any taxes are taken out of your paycheck allowing contributions to avoid Social Security and Medicare taxes, also known as FICA taxes. Some employers may even match employee contributions or contribute a set amount. If you open an HSA on your own, your contributions can be deducted from your taxable income when you file your taxes.
Getting money out of your account is as easy as putting it in. Here are 9 ways to spend from your HSA.
1. Use your HSA debit card
Pay for qualified medical expenses (QMEs) for you, your spouse, or your dependents anytime with a swipe of your HSA debit card. The money will be taken out of your available cash balance. It can be a good idea to keep a set amount of cash in the account based on your expected health care needs and the way you plan to use the account in general. Read Fidelity Viewpoints: How much cash should you keep in your HSA?
As the account owner, you can even authorize your spouse and dependent children to spend from your HSA by requesting additional HSA debit cards in their name as long as everyone meets eligibility requirements. Debit cards are available for the Fidelity HSA®: Spending with your HSA
2. If you have a Fidelity® HSA, receive and pay bills online with Fidelity Bill Pay
Schedule and manage payments for QMEs, set up recurring payments, or enroll in eBills and AutoPay for eligible payees. Set up reminders and even pay bills right from the Fidelity® Mobile app so you’ll never miss a payment. Again, the money will be taken out of your available cash balance.
3. Reimburse yourself
Get money back for QMEs that you paid for out of pocket months—even years—after you originally paid for them. This all means that you could prioritize saving and investing in your HSA until you may need the money. If money’s tight in the future, you could tap into those HSA savings tax-free if you have unreimbursed QMEs. However, there are some rules you have to follow.
- You must have incurred the qualified medical expenses after you opened your HSA.
- The qualified medical expense was not used as an itemized deduction on your tax return. And the medical expense was not previously paid or reimbursed from another source.
- You can’t be reimbursed for a QME from an FSA or other tax-advantaged health-related account today and then again in the future from your HSA.
Be prepared to show receipts in case the IRS audits you. A best practice is to keep both paper receipts and electronic ones for any qualified medical expenses you might want to be reimbursed from your HSA. All requested reimbursements should be exactly the cost of the medical expense to the cent.
If you have a Fidelity HSA, you can download the Fidelity® Health app to easily access and manage your account.
4. Take it with you! You own your HSA
An HSA is yours; it is not tied to a particular employer and does not have a use-it-or-lose it policy. You can take your HSA with you to any offering financial company should you switch employers or retire. You can also spend, invest, or transfer your money at any time, even if you're no longer covered by an HSA-eligible health plan.
You don't forfeit any money you don't use in a given year, and you can carry it forward until you reach a time when you want or need to use the money in your HSA.
5. Invest HSA money for tax-deferred growth potential
Invest HSA money in a variety of securities for growth potential if you’re able to save more than you need for current medical expenses. HSA money that is invested has the potential to grow tax-deferred over time and hopefully lead to more money in the future to pay for rising health care costs. This allows you to build your medical savings even when you are no longer working. You can invest all or some of your HSA money at any time allowing you to save for the future or use the money for present-day expenses.
Plan for your future by contributing what you can for expected or unexpected medical expenses in retirement. Keep in mind that HSA contribution limits are annually adjusted for inflation and consider the costs and benefits of increasing your HSA contributions, if you are able.
Read Fidelity Viewpoints: 5 ways HSAs can help with your retirement
You can estimate your future health care expenses and how much you may want to save by trying our HSA calculator.
6. Retire early
If you retire prior to age 65, you may still need health care insurance to help you bridge the gap to Medicare eligibility at 65. Retirement-related premiums you can pay for with your HSA could include:
- COBRA continuation coverage
- Health insurance while you’re receiving unemployment benefits
- Medicare premiums other than for Medicare Supplemental coverage
- Qualified long-term care insurance subject to limits based on your age
Unlike 401(k)s and traditional IRAs, which require you to start minimum withdrawals called required minimum distributions (RMDs) when you turn 73, you'll never be required to take any money out of your HSA. This can provide versatility in retirement income planning. Read Fidelity Viewpoints How to retire early in 7 steps
7. At age 65, use your HSA to pay for any non-qualified expenses
Starting at age 65, you can use savings in your HSA to pay for just about anything (like taking a family vacation or buying a car) without having to pay a penalty. You will, however, owe income tax on the distribution of HSA dollars used for nonmedical expenses, similar to withdrawals from a traditional IRA.
8. Can reduce taxes in retirement
If you’re able and eligible, you can continue to contribute to your HSA in retirement as long as you aren’t enrolled in Medicare or covered by an ineligible health plan. Beginning at age 55, you may even be able to make catch-up contributions, allowing you to contribute up to an extra $1,000 a year. If you and your spouse are both age 55 or over, not enrolled in Medicare, and otherwise eligible, you each can make $1,000 HSA catch-up contributions, but you must do so in separate HSAs. These contributions can be taken as a tax deduction on your personal taxes.
For more information and a complete list of qualified medical expenses, see IRS Publication 502. See IRS Publication 969 for expenses that can be reimbursed from an HSA that may not otherwise qualify
9. Leave your HSA to your estate or beneficiaries
Naming beneficiaries to your HSA helps ensure a smooth transfer to your heir or heirs. In the event the account holder passes away, HSA money can be transferred to a spouse, allowing them to pay for QMEs tax-free.
If non-spouse beneficiaries inherit an HSA, the rules are different. Non-spouse inheritors are required to take a full, taxable distribution in the year of the owner’s death. Because of that, it can be a less-efficient way to pass on wealth. Consider working with a financial professional to create a tax-efficient strategy to spend your money in retirement and pass on wealth to the next generation.