What is a health savings account?

Learn the ins and outs of an HSA and how to use it to your advantage.

Woman on her laptop researching Health Savings Accounts.

Health savings accounts (HSAs) were created to give Americans a tax-free way to save for medical costs such as insurance deductibles, dental work and vision care. But many people don’t realize that these accounts can also be a powerful financial tool for saving and investing. But how do you determine what an HSA can be used for?

Here’s what you need to know to make the most of your HSA investment option.

  • Determine your eligibility. To contribute to an HSA, you must have a high-deductible health plan (HDHP). For 2022, this is defined as having a minimum annual deductible of $1,400 ($2,800 for family plans) and a maximum out-of-pocket expense of $7,050 ($14,100 for family plans).
  • Understand contributions. The maximum contribution for 2022 is $3,650 ($7,300 for family coverage), but you can contribute an extra $1,000 if you’ll be 55 or older at any point during the year. If your employer contributes to your HSA, that counts toward the limit.
  • Consider whether or not you need to use the HSA for medical expenses. Of course, you can use your pre-tax HSA money to cover qualified medical expenses. If your tax rate is 25% and you use your HSA to pay a $100 emergency room co-pay, it’s really like paying only $75 in after-tax money. But you may want to think about covering your medical expenses out-of-pocket if you can afford to do so and leaving your HSA fund to grow.

HSA benefits

HSAs may help those enrolled in high-deductible health insurance plans (HDHPs) pay for qualified medical expenses. When you’re no longer contributing to the HSA in retirement, it can complement Medicare Supplement policies by helping manage out-of-pocket expenses. In addition to paying expenses, you can also use an HSA as a savings vehicle. Here are some ways to make the most of it:

  • Roll over remaining funds year-to-year. Yes, you can do it indefinitely. The interest accrued on your savings balance is tax-deferred.
  • Contribute until tax day. If you haven't met the annual contribution limit, you may contribute through the tax-filing date the following spring.
  • Move funds if you want to. Your employer may have created your account when you signed up for the HDHP. However, if you'd prefer to use a different HSA, you can arrange to transfer funds. (An HSA is all yours, regardless of whether an employer — present or past — sponsors it.)
  • Maximize your contributions. Contribute the annual limit so you can claim the maximum tax deduction. If you're 55 or older, you also may make a catch-up contribution.
  • Invest with your HSA. Some HSAs allow you to invest the money in mutual funds and stocks, which may generate a greater return. You may need to maintain a minimum amount in the account, but if you can afford it, it's an option to consider.
  • Wait to meet your deductible. If your medical bills are infrequent or you can afford to cover the costs, let your savings continue to grow tax-deferred in the HSA. (If you pay some expenses yourself, keep your receipts so you can request reimbursements once you've met the deductible.)

With a health savings account, the money in an HSA is yours to save. You control how the money is spent and you keep any interest and investment earnings from the account.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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