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A health savings account (HSA) is a tax-favored savings account created for the purpose of paying medical expenses.

  • Tax-deductible
    Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA.
  • Tax-free
    Withdrawals to pay qualified medical expenses are never taxed.
  • Tax-deferred
    Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax-free.
  • HSA money is yours to keep
    Unlike a flexible spending account (FSA), unused money in your HSA isn’t forfeited at the end of the year;
    it continues to grow, tax-deferred.

2021 HSA Contribution Limits
Contribution Limit55+ Contribution
2020 HSA Contribution Limits
Contribution Limit55+ Contribution

An HSA works in conjunction with high deductible health insurance.

Your HSA dollars can be used to help pay the health insurance deductible and any qualified medical expenses, including those not covered by the health insurance, like dental and vision care.

Any funds you withdraw for non-qualified medical expenses will be taxed at your income tax rate, plus 10% tax penalty.

Once you meet your calendar-year deductible, the health insurance pays remaining covered expenses in accordance with the terms and conditions of your particular plan. Some plans pay 100% of covered expenses after the calendar-year deductible is met.

You must:

  1. Be covered by qualified high deductible health insurance plan;
  2. Not be covered under other health insurance;
  3. Not be enrolled in Medicare; and
  4. Not be another person’s dependent.

Other health insurance does not include coverage for the following: accidents, dental care, disability, long-term care, and vision care. Workers’ compensation, specified disease, and fixed indemnity coverage is permitted.

The law.
Federal law states that annual contribution limits are $3,600 for singles/$7,200 for families for 2021 and $3,550 for singles/$7,100 for families for 2020. Individuals aged 55+ may contribute an additional $1,000 for each tax year.

As you shop for an HSA, don’t forget to check the fine print on the savings account. Management fees are common in the financial industry, and they may include:

  • One time set up fee.
  • Monthly maintenance fee.
  • Debit card fee.
  • Printed check fee.
  • Overdraft fee.

Yes. These networks are very often part of the health insurance plan, and they provide discounts on health care. The discounts apply to all care — even prior to meeting the health insurance deductible. So, your HSA plan savings go further.

Generally, yes. Qualified medical expenses include unreimbursed medical expenses of the accountholder, his or her spouse, or dependents.

Nonmedical withdrawals from your health savings account are taxable income and subject to a 10% tax penalty in 2010 and 20% in 2011.

This tax penalty does not apply if the withdrawal is made after the date you:

  1. Attain age 65;
  2. Become totally and permanently disabled; or
  3. Die.

No, this would be a nonmedical withdrawal, subject to taxes and penalty.


No penalty or taxes will apply if the money is withdrawn to pay premiums for:

  1. Qualified long-term care insurance; or
  2. Health insurance while you are receiving federal or state unemployment compensation; or
  3. Continuation of coverage plans, like COBRA, required under any federal law; or
  4. Medicare premiums.

There are three major tax advantages to your HSA.

  1. Cash contributions to an HSA are 100% deductible from your federal gross income (within legal limits).
  2. Interest on savings accumulates tax deferred.
  3. Withdrawals from an HSA for “qualified medical expenses” are free from federal income tax.


A qualified medical expense is one for medical care as defined by Internal Revenue Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. Most expenses for medical care will fall under IRC Section 213(d).

However, some expenses do not qualify.
A few examples are:

  • Surgery for purely cosmetic reasons
  • Health club dues
  • Illegal operations or treatment
  • Maternity clothes
  • Toothpaste, toiletries, and cosmetics

HSA money cannot generally be used to pay your insurance premiums. See exceptions above under “Can my HSA be used to pay premiums?”.

*See IRS Publications 502 (“Medical and Dental Expenses”) and 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”) for more information.

Under the law, yes, but make sure your financial institution accepts lump-sum deposits. You may also be required to continue minimum monthly deposits. Lump-sum deposits may not exceed the maximum annual contribution limit.

Yes, the tax law requires an annual Cost of Living Adjustment (COLA) based on changes in the Consumer Price Index.
This calculation, rounded to the nearest $50 increment, affects deductible limits, maximum out-of-pocket amounts, and the maximum annual HSA contribution limits.Health insurance deductibles may change by the COLA each year.

Yes, having an HSA in no way restricts your ability to have an IRA.

The law is silent on this point at the present time.

Your HSA will be treated as your surviving spouse’s HSA, but only if your spouse is the named beneficiary. If there is no surviving spouse or your spouse is not the beneficiary, then the savings account will cease to be an HSA and will be included in the federal gross income of your estate or named beneficiary.

Once your account is open, a deposit has been made to your account and funds are available, you can start using your HSA. You are 100% vested as soon as the funds are deposited and you have total control over the funds.

You are eligible to receive tax-free reimbursement for qualified health expenses not covered by your insurance as defined by Section 213(d) of the Tax Code. A list of these expenses is available on the IRS website, HSA distributions used for any purpose other than the qualified medical expenses listed will be taxable, and the appropriate tax rules will apply.

Individuals aged 55 and over may contribute an additional $1,000 above the maximum for each tax year.

If an individual is age 65 or older, regardless of whether the individual has been enrolled in Medicare, there is no penalty to withdraw funds from the HSA. As always, normal income taxes will apply if the distribution is not used for unreimbursed medical expenses (expenses not covered by the medical plan).

The near-term impact on HSA plans is limited to (1) an increased penalty on HSA distributions that are not used for qualified medical expenses for those under the age of 65 from 10 to 20 percent and (2) the exclusion of most over-the-counter medications as a qualified medical expense unless they are prescribed by a physician.

Nonmedical withdrawals from your health savings account are taxable income and subject to a 10% tax penalty in 2010 and a 20% tax penalty as of January 1, 2011.

This tax penalty does not apply if the withdrawal is made after the date you:

  1. Attain age 65;
  2. Become totally and permanently disabled; or
  3. Die.