Health savings account tax benefits: How to save for healthcare tax-free with an HSA
Editorial staff, J.P. Morgan Wealth Management
- A health savings account (HSA) can offer three ways to save money on taxes: Contributions reduce your taxable income, your HSA balance grows tax-free and withdrawals that are used for qualified medical expenses aren’t taxed.
- If an HSA isn’t available to you, a healthcare FSA or an employer-funded HRA may also be a tax-advantaged account that you can use to pay for medical expenses.
- When invested and left to grow, the money in an HSA can become a tax-free resource for healthcare and other costs in retirement.
Healthcare can be expensive. Thankfully, a health savings account (HSA) may be able to help. If you are eligible for one, it’s important to understand the tax benefits of this kind of account. HSAs allow you to save pre-tax money in an account that you can then use for medical expenses now and in the future. The funds in an HSA never expire, roll over year to year and grow tax-free. Withdrawals from HSAs are tax-free, too, so long as the funds are used to pay for qualified medical expenses, as defined by the Internal Revenue Service (IRS).
Understanding your HSA and its tax benefits can help you plan for your healthcare expenses in the best way. If an HSA isn’t available to you, there may be other options for you to consider.
Health savings accounts can help you save for healthcare tax-free
Most tax-advantaged accounts give you one tax break. For example, a 401(k) lets you contribute pre-tax money, but you’ll pay taxes on your distributions. With an account like a Roth IRA, you contribute after-tax dollars; and if you meet the requirements at the time of your withdrawals, your distributions won’t be taxed.
An HSA offers three ways to save on taxes:
- Contributions reduce your taxable income.
- The balance grows without being taxed.
- Withdrawals for qualified medical expenses are tax-free.
The catch is eligibility. To open and contribute to an HSA, you must:
- Be enrolled in a high-deductible health plan (HDHP)
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
- Not be covered by any non-HDHP health plan, including a spouse’s plan
For 2026, an HDHP means a health insurance plan with a minimum deductible of $1,700 for individuals and $3,400 for families. For 2027, those deductibles increase to $1,750 and $3,500, respectively.
If you qualify for an HSA, the 2026 contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. For 2027, those limits increase to $4,500 and $9,000, respectively. Catch-up contributions are allowed for individuals age 55 and older. If you have self-only coverage, you can contribute an additional $1,000. If you have family coverage and both spouses are age 55 or older, you can contribute an additional $1,000 for each spouse ($2,000 total) provided each spouse has their own HSA.
You have until the tax-filing deadline without extensions, generally April 15, to make contributions that count for the prior tax year. Limits are typically adjusted annually for inflation, so it’s worth checking the current figures before you contribute.
One particular feature that sets HSAs apart from some other savings accounts is the fact that you own the account. If you change jobs, switch health plans or retire, the balance goes with you and the funds do not expire; there’s no deadline to use the money by.
The IRS list of qualified expenses for an HSA generally includes:
- Doctor visits and hospital services
- Prescription medications
- Eligible over-the-counter medications and healthcare products
- Dental care (cleanings, fillings, orthodontics)
- Vision care (exams, glasses, contacts)
- Psychiatric care, psychoanalysis and psychological services
- Certain medical equipment and supplies
Funds used for anything outside the IRS list of qualified expenses are subject to income tax and may be subject to an additional 20% tax.
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Other accounts you can use to save for healthcare expenses
An HSA isn’t the only tax-advantaged option for healthcare costs.
A healthcare flexible spending account (FSA) is an option offered by many employers that lets you set aside pre-tax dollars for qualified medical expenses, similar to an HSA. A key distinction between the two is that an FSA does not require an HDHP plan to participate, which makes it accessible to more people.
Another distinction is when you can use the money. FSA funds generally must be used within the plan year and can’t roll over. So you’ll lose anything you don’t use within the plan year.
Some employers offer a grace period or allow a modest carryover of up to $660, but those provisions can vary by plan. You may want to start by contributing what you’re confident you’ll spend. Predictable expenses such as ongoing prescriptions, planned dental work and recurring therapy can be good options.
If you do have an HSA, a limited-purpose FSA can extend your tax benefits. A limited-purpose FSA typically covers dental, vision, accident, disability and telehealth costs. Pairing the two may allow you to reserve HSA funds for larger or future medical costs while still covering dental and vision costs with pre-tax dollars.
Another health savings account type is a health reimbursement arrangement (HRA), which is funded exclusively by your employer. You contribute nothing.
With an HRA, your employer sets the rules: what expenses qualify, how much is available and whether any balance carries over. In many cases, you forfeit unused funds when you leave the job, but you should check the terms with your employer to understand your specific HRA.
Regarding other types of accounts for healthcare savings, two limits to know about are as follows:
- You can’t be reimbursed for the same expense twice. If an FSA covers a bill, your HSA can’t cover it again.
- If you’re covered by a standard healthcare FSA or HRA that pays qualified medical expenses, you generally can’t contribute to an HSA at all, even if you’re on an HDHP. A limited-purpose FSA avoids this exception.
Use your HSA to plan for the future, too
Many people may treat an HSA like a spending account: Money goes in and payments for medical bills come out. That’s reasonable, but it leaves one of the account’s more useful features unused.
Because the IRS sets no deadline for reimbursing yourself, you can pay qualified expenses out of pocket today, let your HSA balance grow and reimburse yourself years later. You just need documentation. Keep receipts for every qualified expense you don’t immediately reimburse, including the amount, date and nature of the expense.
A growing balance also opens the door to investing. Many HSA providers allow you to invest your HSA funds when they are above a minimum cash threshold, often once your balance exceeds $1,000.
The logic is the same as any long-term account: The longer the balance stays invested, the more it can grow. Fees and investment options vary by provider, so they’re worth comparing before you commit.
Over the long term, a funded HSA can help you meet the substantial costs of healthcare in retirement.
Common mistakes to avoid with healthcare savings accounts
The tax benefits of these accounts come with rules, and the consequences for breaking them can be steep. The most common mistakes include:
- Contributing to an HSA when you’re not eligible: If your coverage changes midyear – for example, if you join Medicare, switch to a non-HDHP plan or get added to a spouse’s non-HDHP coverage – your eligibility ends. Contributions made after that point are subject to income tax and a 6% excise tax.
- Overcontributing: Excess contributions carry the same 6% tax. You can correct an overcontribution by withdrawing the excess before your tax-filing deadline.
- Using HSA funds for nonqualified expenses: The withdrawal is taxed as ordinary income and may be hit with an additional 20% tax, unless you’re 65 or older, at which point only ordinary income tax rules apply.
- Missing FSA deadlines: Grace periods and carryover provisions vary by plan. If you don’t know your plan’s rules, find out before the year ends.
- Not keeping receipts: No documentation means no defense if you’re audited.
The bottom line
Opening an HSA means you can contribute, grow and spend pre-tax money on qualified health expenses tax-free. But it requires the right health plan and discipline to track how you use it. An FSA or HRA can help fill gaps depending on your situation. Used well, these accounts can put money back in your pocket that might otherwise go to taxes.
Frequently asked questions about HSA tax benefits
You’re eligible if you’re enrolled in a high-deductible health plan (HDHP) and not covered by Medicare or a non-HDHP health plan or claimed as a dependent on someone else’s tax return. Your health plan’s summary of benefits will indicate whether it qualifies.
Most HSA providers allow you to invest funds once your balance exceeds a minimum threshold, often around $1,000. It typically makes sense if you have enough savings to cover near-term medical costs out of pocket and can leave the HSA balance untouched to grow.
Holding a standard healthcare FSA in the same year would disqualify you from having an HSA. A limited-purpose FSA, which covers dental, vision and certain other expenses, is compatible with an HSA.
Yes. The IRS can audit HSA withdrawals at any time, so there’s no safe point at which you can discard documentation. Keep records of the amount, date and nature of every qualified expense you reimburse from your HSA.
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Editorial staff, J.P. Morgan Wealth Management
