Are HSA Contributions Tax Deductible? Answers to 11 Essential HSA Questions

Jan 16, 2024

If you’ve ever had questions about a Health Savings Account (HSA), you’re not alone.  

What are they used for? How do taxes work? Should I get one?  

Answering these and other questions can help you take advantage of the investment and saving options available to you.  

How does an HSA work?

Contributing to an HSA allows you to save for medical expenses by putting money aside in a tax-advantaged account. Think of it as a personal savings account that can only be used for qualified health expenses.

What counts as a qualified health expense?

You can use HSA funds to pay for qualified healthcare costs. These costs include a wide range of medical, dental, and mental health expenses, including copayments, prescription drugs, and insurance deductibles (but usually not premiums).

Can an HSA be used when you retire?

These funds can be used into retirement, serving as a nice cushion for unexpected medical expenses. Any money you withdraw from the account for these qualified purposes is tax- and penalty-free.

What’s the difference between an HSA and an FSA?

People often compare HSAs to Flexible Spending Accounts (FSAs), but there are a few key differences:


  • You’ll have access to your HSA even if you switch jobs. An FSA needs to be spent prior to switching jobs.
  • HSAs can be grown over time because you can invest the funds in securities, interest-earning savings accounts, and money market accounts of your choosing.  
  • With an HSA, you can change your contributions at any time.

Are there HSA contribution limits? Are these contributions tax deductible?

The Internal Revenue Service limits your annual HSA contributions, but you can deduct them from your federal income tax. Contribution limits vary depending on your age, insurance coverage selection, and any employer contributions to the account.

Reference the latest IRS guidelines or talk to your advisor to learn more about HSA contribution limits.  

Are HSA funds ever taxed? What if you use them for non-medical expenses?

You can use HSA funds throughout your life for qualified medical expenses, and the IRS won’t tax any account contributions, withdrawals, or interest accrued from investments. HSA funds also aren’t “use it or lose it,” meaning that if you don’t use all the funds in a given year, the money remains in your account. 

However, if you’re under age 65, you will pay income tax plus a 20 percent penalty if you withdraw the funds for something other than qualified medical expenses.  

If you are over age 65 and use your HSA for non-qualified expenses, you won’t be subject to the 20 percent penalty—just regular income tax.  

What happens to my HSA after I pass away?

HSA funds can even be used after you pass away if you designate a beneficiary. If the beneficiary is your spouse, they can use the account as though it were their own and enjoy all the tax benefits.  

If the beneficiary isn’t your spouse, the account’s funds can still be used, but they become taxable. 

Am I eligible for an HSA?

Anyone can open an HSA, provided they:  

  • Are currently covered by a high-deductible health plan (HDHP)  
  • Aren’t 65 or older and covered by Medicare
  • Can’t be claimed as a dependent on someone else’s tax return.  

If you choose to leave your HDHP plan, you’ll no longer qualify to contribute to your HSA. However, you can still withdraw from the account for qualified expenses or let the funds continue to grow tax-free.

Who benefits the most from an HSA?

HSAs are a great fit for people who are young and healthy or have a higher-than-average income and can enjoy the tax benefits.  

When you’re on an HDHP plan, you’re responsible for covering a high deductible out of pocket. This means the premiums are probably lower than what you’d pay for a traditional healthcare plan. This helps you to contribute to the HSA and, depending on your contribution amount and total medical expenses, possibly pay less for your health care.  

Additionally, the account’s year-over-year rollover feature allows you to accumulate money when you don’t have many health expenses. This allows you to build (and possibly grow) funds to cover future emergencies or health complications. 

In addition to considering an HSA for yourself, encourage your younger friends and family to look into an HSA today, assuming they are eligible.  

Who shouldn’t open an HSA?

While HSAs have many benefits, they’re not for everyone.  

If you open an HSA and have relatively high healthcare expenses, you could risk losing the account’s ability to save and grow—and in coming years, if the HSA is depleted, you may wind up paying all of your deductible out of pocket.  

If you have a large family, an HSA may not be the best choice. The more people you need to cover, the more medical expenses you have, and the higher the risk that someone will incur expensive healthcare costs that could drain the account. 

Is an HSA the right choice for me?

Choosing a healthcare plan is a difficult decision and depends on your unique situation. Speak with your financial professional for more information on the advantages of an HSA and if it makes sense for you. 

If you have more questions about health savings accounts, reach out to our team using the form below or email [email protected]. 

Source: “Could a Health Savings Account Work for You?” Bamboo. n.d. Slick_210419_Creative-Ways-to-Utilize-HSAs_281636.indd (  

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