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What is an HSA? Understanding How Health Savings Accounts Work


Healthcare can be one of life's major expenses, so understanding how to manage these costs is crucial. One tool that has become popular for this purpose is the Health Savings Account (HSA).

An HSA can help you manage your healthcare expenses for the first time or optimize your financial planning. Let’s dive into what HSAs are, how they work, and why they might be a good fit for your financial health toolkit.

What is an HSA?

A Health Savings Account (HSA) is a special savings account where you can put money aside before taxes to use for medical expenses. You may be eligible to open an HSA if you have a High Deductible Health Plan (HDHP), you aren’t on Medicare, you don’t have other health coverage, and you aren’t claimed as a dependent on someone else's tax return.

Key Features of HSAs

Tax Benefits: The tax benefits of HSAs are significant! With an HSA, you get a triple tax benefit:

  • Tax-Deductible Contributions: The money you contribute to your HSA can be deducted from your taxable income. This means you pay less in taxes each year, reducing your overall tax burden.
  • Tax-Free Growth: The money in your HSA grows tax-free. Any gains within the account are not subject to taxes, allowing your savings to accumulate faster than they would in a taxable account.
  • Tax-Free Withdrawals for Medical Expenses: You do not pay taxes when you use your HSA funds for qualified medical expenses. This can include everything from doctor's visits and prescription medications to dental and vision care.

Transferability and Ownership: One of the best features of an HSA is that it stays with you. Regardless of your employment status or where you get your health insurance, the HSA is yours. You own the account and control how you spend the money.

Contribution Limits: The IRS sets annual limits on how much you can contribute to your HSA. These limits are updated each year and apply to both individual and family coverage. You, your employer, or both can make contributions to the account, but the total must not exceed the annual limit set by the IRS.

How Does an HSA Work?

Opening an HSA: You can open an HSA through many credit unions and banks. Some employers also offer them as part of benefits packages. To open an HSA, you need to be part of a High Deductible Health Plan (HDHP). Your deductible is the amount you must pay for covered health expenses before your insurance plan starts to pay.

For a plan to qualify as an HDHP, the IRS sets annual deductible limits that are updated each year. These limits apply to both self-only and family coverage. Remember, you aren’t eligible for an HSA if you are on Medicare, have other health coverage, or are claimed as a dependent on someone else's tax return.

Managing Contributions: You can make pre-tax contributions from your paycheck with direct deposits. Otherwise, you can contribute post-tax and deduct those contributions from your income when you file your taxes.

Using HSA Funds: You can use your HSA funds to pay for or reimburse yourself for IRS-approved medical expenses. Prescriptions, over-the-counter medications, vision and dental care, and doctor’s visits are some expenses an HSA can qualify for. Be sure to keep receipts and records of your expenses for tax purposes.

Investment Options: Many HSAs offer investment options like those found in retirement accounts. These investment options usually become available once your balance reaches a certain amount, such as $1,000. This makes HSAs great for long-term healthcare savings, especially if you can pay current medical expenses out-of-pocket and allow your HSA funds to grow.

Comparing HSAs with Other Healthcare Accounts

HSAs are often compared to Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs). Unlike FSAs, which generally have a “use it or lose it” policy, HSAs allow you to roll over the balance from year to year. Unlike HRAs, which employers own, HSAs are owned by you, the individual. FSAs also have lower contribution limits and are typically offered by employers, while HRAs are fully funded by employers with no employee contributions.

Best Practices for Using an HSA

To get the most out of your HSA, contribute the maximum amount allowed each year and consider investing part of your balance for faster growth. Plan your healthcare expenses wisely, and remember that saving in your HSA for future health costs can bring large financial benefits.

Overall, HSAs offer a flexible, tax-advantaged way to save and pay for medical expenses now and in the future. They empower you with more control over your healthcare spending and can be a valuable part of your financial plan. If you’re eligible for an HSA, think about how it can help secure your health and financial well-being in the years to come.

Interested in starting an HSA? Call us at (888) 786-2791 or visit one of our branches to get started and make the most out of this beneficial savings account.


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