A health savings account (HSA) might be saving's best-kept secret. It can help you save for medical expenses and create a financial cushion for the future.
If you're covered by an HSA-eligible health plan (a high-deductible health plan), you can open and contribute to an HSA. Even if you're still on your parents' health insurance (but not claimed as a dependent on someone else's tax return) you may be eligible to open an HSA. In an HSA, you can contribute pre-tax dollars from your paycheck automatically, and your employer might match those contributions, tax-free. Then, you can invest contributions without paying federal income taxes on any growth. The money you take out won't get taxed either, as long as it goes toward qualified medical expenses where conditions are met, for example, doctor visits and prescriptions.1
What does this have to do with retirement? Starting at age 65, there's no penalty to use HSA money for nonmedical expenses. You will have to pay income tax though, similar to pre-tax withdrawals from your 401(k). An HSA is another way to save if you've maximized your 401(k) or IRA savings.
Read on to better understand the benefits of opening and contributing to an HSA in your 20s and 30s.
1. HSAs can be your emergency medical savings
Health care costs are likely to be lower in your 20s and 30s than when you're older,2 but that doesn't mean you won't ever get hit with a big bill. Medical expenses often come when you least expect. In fact, about a quarter of millennials and Gen Zers have medical debt because of an accident or injury.3
Money contributed to an HSA can avoid federal income tax. Because potential investing gains can be tax-free, your HSA savings can potentially grow, easing a financial blow and sparing your emergency savings, if an expensive health issue surfaces.
2. HSAs can also help you pay for certain health care, vision, and dental costs
Even if you don't have a big bill, HSAs can be helpful for covering everyday health expenses. Over-the-counter products such as pain relievers, allergy medicine, and acne treatments can be paid with HSA funds. Copays for doctors' visits and prescriptions, dental cleanings and braces, eye exams, and contacts also count. Even LASIK eye surgery can be paid for out of an HSA.4 Check out a list of eligible expenses.
3. HSAs can help you save for future medical expenses
Unlike flexible spending accounts (FSAs) that may have a "use it or lose it" rule, money in an HSA rolls over year after year. If you're saving for something big, for example fertility procedures or medically necessary surgery—HSA money could help you with funding. Whatever's left can be used in retirement.
On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses.
Contributing to your HSA early and often and investing those savings can help you better afford medical care later.
The contribution limit for 2024 is $4,150 for individual coverage and $8,300 for family coverage.
4. HSAs can grow on their own over time
Funds in an HSA can be invested, giving that money the potential to grow like any other investment account. If you invest early, you could benefit from compound growth. The new money you've made has the potential to grow if you keep it invested. Even though investing isn't without risk of loss, the longer you keep your money in the market, the greater potential for growth.
To learn more, read our guide to HSA investing: Ways to invest in your health savings account.
5. Employers may help fund your HSA
Many employers match contributions made to HSAs, which means for every dollar you add, they too will either match or add money up to a certain limit. Some employers may opt to contribute a lump sum to your HSA, often at the beginning or end of the year.
In 2023, 31% of all dollars contributed to an HSA came from employers, with the average employer contribution being $726.5 Employer contributions can jump start your savings.
You're not tied to the HSA your employer provides. You can shop around and compare different options, but make sure any matching from your employer still applies if you opt for another HSA provider.
6. HSAs offer a cushion when you change jobs
Potential medical expenses can be especially scary when you're in between jobs or doing freelance work. A healthy HSA can help pay for qualified medical expenses if you lose your health insurance. Also, if you're changing jobs, HSAs are portable.
If your new employer offers an HSA-eligible health plan with an HSA, it's possible to keep your old HSA or roll your funds into the new one.
If your new employer doesn't offer an HSA-eligible health plan, you can still keep your old HSA; you just won't be able to contribute to it.
Interested in learning more about HSAs? Visit our HSA homepage. If you have an employer-sponsored Fidelity HSA, you can log in to NetBenefitsLog In Required to access your account.