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The Short Answer

What Is an HSA?

All you need to know about this popular account used to cover healthcare expenses.

A health savings account offers powerful tax benefits that stretch your healthcare dollars further. You contribute pretax dollars to the account, and your invested money grows tax-free. You can also withdraw money tax-free if you use it for qualified medical expenses (some state taxes might still apply). This triple tax benefit makes HSAs a helpful tool with two roles: You can spend money on current healthcare expenses or invest to cover future ones.

You also keep your HSA money until you use it, even if you change employers. This portability differentiates an HSA from a flexible spending arrangement, another account that covers healthcare expenses. You usually lose FSA money if you change employers or have any remaining funds after the plan year (with a few exceptions).

Do I qualify for an HSA?
You have to be enrolled in a health insurance plan that qualifies as a high-deductible health plan. Your deductible is how much you pay before your insurance kicks in--meaning it starts covering part or all of each eligible healthcare expense. For 2020, a high deductible is at least $1,400 for a self-only insurance plan and $2,800 for a family plan. (Note that the IRS regularly adjusts these figures upward for inflation.)

Your health insurance plan's out-of-pocket maximum also cannot exceed $6,900 (or $13,800 for family coverage). You also cannot be a dependent on a tax return, enrolled in Medicare, or enrolled in another health insurance plan (unless permitted under other health coverage).

What is the maximum HSA contribution for 2020?
In 2020, you, your employer, and anyone else can contribute to your HSA, but combined contributions must be at or below $3,550 for a self-only insurance plan and $7,100 for a family plan. If you're over age 55, you can contribute $1,000 more to both plans.

What can I buy with HSA money?
You can spend HSA dollars on qualified medical expenses, which generally include dental, vision, and prescription costs. (You can see a full list of qualified medical expenses on the IRS website.) You'll pay a steep 20% penalty tax and regular income tax on HSA withdrawals used for nonqualified medical expenses, so try contacting your doctor's office if you're unclear whether a healthcare expense qualifies.

Where should I open my HSA (and does it impact how I contribute)?
If your employer sponsors an HSA that qualifies as a section 125 cafeteria plan, you may want to start your search there. If you elect to defer part of your pretax salary into the employer-sponsored HSA, these contributions (and any employer match) are not subject to Social Security and Medicare taxes. You won't reap this additional tax benefit by contributing aftertax dollars to your HSA (though you can still deduct the contributions from your taxable income when filing income taxes).

You might also receive some extra benefits from an employer-sponsored HSA. Your employer might contribute money to your HSA (though you can transfer any funds into another HSA, as Morningstar's director of personal finance Christine Benz has explained). Additionally, as Morningstar's director of multi-asset ratings Leo Acheson highlights, some employers cover the HSA fees that you'd pay if you opened the HSA on your own.

If your employer doesn't sponsor an account, you can use Morningstar research to find a topnotch HSA. Our analysts rate HSAs on various criteria including fees, interest rates, and investment quality--depending on whether you use the account for spending or investing.

How should I invest in my HSA?
If you're using your HSA to invest, you must first determine your time horizon and an appropriate risk level, which will then inform your asset allocation. Then you can use Morningstar research to find the best investments for your needs.

If you plan to spend and invest with your HSA, consider keeping at least your deductible amount (or even your maximum-out-of-pocket amount) in cash. Then, you can cover any healthcare expenses up to your deductible. You can invest any remaining money to grow into superdollars.

Are there any other ways that I can use an HSA?
You can use HSA funds in these other ways:

  • As a retirement account: Benz notes that after age 65, you can withdraw HSA money for any purpose and avoid the 20% tax penalty. However, you'll pay regular income tax on withdrawals for nonqualified medical expenses. 
  • To pay insurance premiums under COBRA: You generally can't use HSA money to cover an insurance premium or regular payments for an insurance policy. However, if you lose your job and you keep your insurance under the Consolidated Omnibus Budget Reconciliation Act's (COBRA) continuation coverage, you can pay the premium with HSA funds. Using tax-advantaged HSA dollars to pay COBRA premiums is a helpful benefit, because COBRA enrollees are often responsible for paying the entire premium.
  • To cover long-term care: Benz also notes that investors can use their HSA to fund long-term care expenses. You can either use the money to cover long-term care costs or to pay insurance premiums (up to a specific amount for qualified contracts).