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What is an HSA? Health Savings Accounts Explained

What Is an HSA? 

A Health Savings Account [HSA] is a tax-advantaged savings account available to individuals covered by a High Deductible Health Plan [HDHP]. Contributions to an HSA are tax-deductible, and the funds can be used for qualified medical expenses, both current and in the future. HSA funds can be invested and grow over time, making them a valuable long-term savings tool. They are also portable, so if you change jobs or own your own business you will continue to have access to your account.

How Does an HSA Work? 

Most of the time, those with access to an HSA through their employer can make contributions via payroll deductions. For people who own their own business or get an HSA on their own, contributions can be made via ACH or automatically deducted from another account on a regular basis. HSAs usually come with a debit card to pay for your medical expenses easily. 

Your HSA is triple tax advantaged. Contributions to an HSA are tax-deductible, earnings on an HSA are not subject to taxes, and withdrawals from an HSA are not taxed as long as they are used for a qualified healthcare expense. However, funds that are used for non-qualified expenses are subject to a 20 percent penalty in addition to taxes on the withdrawal.
The funds in your Health Savings Account can roll over year after year to build over time. You can choose how the funds in your HSA are invested, depending on your goals and risk tolerance.  HSAs have no required minimum distribution, so your money will stay there until you use it. Additionally, HSAs are portable so if you change jobs or insurance plans, you can bring your HSA with you.

Using an HSA as a Retirement Account

Some people use an HSA as a retirement savings account. Once you turn 65, an HSA functions very similarly to a traditional IRA, with a few key differences.  After you turn 65, the funds in your HSA are no longer subject to the 20 percent withdrawal penalty if spent on non-qualified expenses. Like a traditional IRA, withdrawals for non-qualified expenses are still subject to income taxes, but there is no required minimum distribution like there is with a traditional IRA. Using an HSA as a retirement savings account might be good for someone who would otherwise be well-served by a traditional IRA but does not want to have to take required minimum distributions when they turn 73.

Eligibility and How to Get an HSA

In order to be eligible for an HSA, you must be enrolled in a high-deductible health insurance plan [HDHP] and have no other health insurance. You cannot be claimed as a dependent on someone else’s tax return or be enrolled in Medicare. 

The IRS determines what is considered an HDHP. Not all plans that have high deductibles qualify for an HSA, so when you’re shopping for insurance, make sure you look for plans that say they are HSA-eligible. For 2024, a qualifying insurance plan has a deductible of at least $1,600 for an individual or $3,200 for a family, according to the IRS

You may be able to get an HSA through your employer, but many financial institutions also offer HSAs. Farm Bureau Bank offers a variety of HSA products with different options for investing and growing your contributions. Each of our Health Savings Accounts offer an FDIC-insured investment option that can be integrated with any qualified health plan.

HSA Contribution Limits

Each year, the IRS sets contribution limits for HSAs. For 2024, individuals with their own coverage under an HDHP can contribute up to $4,150. Individuals with family coverage under an HDHP can contribute up to $8,300.  Individuals who are over 55 can contribute an extra $1,000 annually as a “catch up” contribution.

Advantages and Disadvantages


  • Your contributions to an HSA are tax-deductible or pre-tax. This means that it is not included in your annual gross income and will not be subject to income tax.
  • You can invest the money in your HSA and any earnings are tax-free as long as the money is used for qualified healthcare expenses.
  • Withdrawals are tax-free as long as they are used for qualified healthcare expenses.
  • You can use HSA funds now or in the future. 
  • Others such as an employer or relative can contribute to your HSA. 
  • There are no requirements to spend the money within a certain time. Any money left in your HSA at the end of the year rolls over to be used in the future. 
  • Your HSA is portable if you change employers or insurance companies. You will still be able to use the funds for qualified healthcare expenses. 
  • There are lots of things that qualify for you to spend HSA funds on, such as hearing aids, glasses, bandaids, many over the counter health products, and more.
  • HSAs can be invested in many assets such as money market accounts, CDs, etc. to grow your contributions. 
  • HSAs can be passed on to your designated beneficiary when you die. 


  • Funds can only be spent on qualifying healthcare expenses.
  • Funds used for other expenses are subject to income taxes, as well as a 20 percent tax penalty. After you turn 65, you’ll still owe taxes but not the penalty.
  • Some HSA providers charge monthly or per-transaction fees. Be sure you understand the fee schedule when you’re opening an HSA. 

HSA vs. Flexible Spending Account [FSA]

There are some similarities between HSAs and FSAs, but key differences make each option more suitable for different situations. Both types of accounts usually come with a debit card for spending. For HSAs and FSAs, contributions are tax-free up to the contribution limits. Money spent from both types of accounts are tax-free as long as it is used for qualifying healthcare expenses. This is about where the similarities end. 

  • HSAs have more potential to grow over time because the balance can be rolled over from year to year and the funds can be invested. FSA funds must be spent by the end of each year or they are lost, and they cannot be invested. 
  • You must have an HDHP to qualify for an HSA. FSAs can be used with any health plan. 
  • Contribution limits to HSAs are higher than FSAs.
  • An HSA is portable if you change jobs or insurance plans. FSAs are not, so if you leave your job you will lose the balance in your FSA. 
  • You can change the amount you contribute to your HSA whenever you like, but the contribution amount for FSAs is usually decided once per year during annual enrollment. 


If you have a high-deductible health plan, using an HSA to save for medical expenses is a wise move. You’ll be able to take advantage of tax benefits and build up savings for your healthcare expenses now and in the future. 

Tags:   financial tips, personal finance, savings