Health savings accounts enable you to save money to use for qualifying medical expenses. Available funds in an HSA will earn interest, tax-free. Also, similar to a 401(k), you can invest your fund, which means your money can grow beyond what you invest.
Unlike 401(k) accounts, though, HSA withdrawals are not taxed — unless you use the money for an unqualified expense before you’re 65. In that case, not only is it taxed, it’s also subject to a 20% penalty.
(If you withdraw the money for a non-medical expense after you turn 65, however, it will still be taxed as income, but there’s no penalty fee.)
Contribution caps are another difference between FSAs and HSAs. With FSAs, employers set the maximum limit; with HSAs, the IRS establishes the minimums and maximums.
For 2022, for example, those who meet the HDHP threshold can contribute up to:
- $3,650 for self-only coverage in an HSA
- $7,300 for family coverage in an HSA
Wondering about that HDHP threshold? That can change each year too. For 2022, health plans with a minimum deductible of $1,400 (individual) or $2,800 (family) are considered HDHPs whose subscribers are eligible to contribute to an HSA.
Other key characteristics of an HSA are:
- Employers can contribute to your HSA, but they don’t own it. That means the money you save goes with you, even if you change jobs.
- No employer? No problem. Individuals can open their own HSAs, even if they’re self-employed or their employers don’t offer the benefit.
- The money you don’t use in your HSA gets rolled over to the next year, so you never forfeit it and can be used for future healthcare expenses.