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How to Save Money on Healthcare with an HSA

Money Girl explains who’s eligible to have a Health Savings Account (HSA), the rules for using one, and how they help you keep more money in your pocket - now, and in the future.

By
Laura Adams, MBA
Episode #391

What Can You Pay For Using a Health Savings Account (HSA)?

Funds in an HSA can be used to pay for a wide range of qualified medical expenses until your plan deductible is met - or ones that simply aren’t covered by your HDHP. These might include co-pays for doctor visits, going to the dentist, or getting prescription glasses.

The IRS says for an expense to be qualified, it must pay for healthcare services, equipment, or medications. You can see the full list of qualified expenses in IRS Publication 502, Medical and Dental Expenses. There are some you might not expect, such as acupuncture, chiropractic, drug addiction therapy, and capital expenses for home improvements related to medical issues.

You need a prescription to buy drugs (except for insulin) with HSA funds. So if you can get a prescription for drugs that are also available over-the-counter, such as Allegra, you can also buy them using tax-free HSA money!

You can also reimburse yourself for past medical expenses, if they occurred after your HSA was established. It’s a good idea to save all your prescriptions and receipts as backup for your taxes.

In general, you can’t use HSA funds to pay your health insurance premiums—unless you’re unemployed, are over age 65, or have a long-term care policy.

If you use your HSA money to pay for anything other than qualified medical expenses, the amount will be taxed as income, plus a 20% tax penalty. However, if you reach age 65 and still have money in an HSA, the penalty doesn’t apply. If you spend it on non-qualified expenses, like a trip to Hawaii, it would simply be subject to income tax.

Benefits of a Health Savings Account (HSA)

To sum up, here are 6 major benefits of having an HSA:

  • Contributions are tax deductible up to the annual legal limit. That means you reduce your taxable income and the amount of tax you have to pay by funding the account.
  • You never lose funds because they stay in the account from year to year for your entire life, with no penalty if you don’t spend them.
  • Withdrawals are never taxed, as long as you spend them on qualified medical expenses.
  • It grows tax-free when you have interest earnings or investment gains, as long as you spend them on qualified medical expenses now or in retirement.
  • You can spend it on you, your family, or your dependents when there are qualified, out-of-pocket, medical expenses.
  • You own it and can decide how much to save or spend each year. An HSA is portable, so if you change employers, switch health plans, or become unemployed, it’s yours to keep.

If you’re eligible for a HSA, it’s a terrific and easy way to cut your taxes and save money on a variety of healthcare expenses. It can give you peace of mind when you have unexpected medical needs to know exactly where the money will come from. 

However, HDHPs aren't the best choice for everyone. They work in your favor when you're in relatively good health, and aren't likely to spend the full deductible each year. 

I hope the benefits I've reviewed will encourage you to investigate more about HDHPs and HSAs - or to contribute the maximum if you already have an HSA. 

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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