HSA 101: A 2023 Guide to Health Savings Accounts

Truth be told, it’s more likely that you’ll live longer than your grandparents did. The flip side is that you may spend far more on doctors’ bills and treatment for chronic illnesses than your parents or grandparents. With healthcare costs continuing to rise along with life expectancies, health savings accounts (HSAs) are an increasingly popular way to bridge the retirement and health savings gap.

Most retirees are underfunding their future healthcare needs.

It’s difficult to visualize an unknown future — let alone one that includes health care expenses and knowing how much money to set aside to pay for them. But according to a 2021 research report,¹ a 65-year-old couple retiring today will need $662,156 to cover their total lifetime healthcare costs. Additionally, the average cost of a semi-private room in a nursing home in 2020 was $255 per day. ² Another report suggests a growing funding crisis: according to HSA Bank, 50% of consumers never set aside money for future healthcare costs.³

How do HSAs work?

A health savings account (HSA) is a type of savings account that you can use to save money specifically for medical expenses. An HSA allows you to lower your federal income tax bill by making tax-free deposits into your HSA account each year. 

To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health insurance policy (HDHP), either through your employer or on your own. The Internal Revenue Service (IRS) has set minimum deductibility limits for HDHPs of $1,500 for individuals and $3,000 for families for 2023. You also can’t be covered by another person’s health plan, and your income isn’t a factor in your eligibility. 

There are yearly limits for depositing into your HSA, adjusted yearly for inflation. These limits for 2023 are:

• $3,850 for self-only HDHP coverage
• $7,750 for family HDHP coverage

If you are the age of 55 or older at the end of your tax year, your contribution limit increases by $1,000.

The amount you contribute to your account can be invested in basic interest-bearing accounts or funds. And the amounts deposited along with any earnings can be withdrawn tax-free at any time to pay for qualified medical expenses not covered by your HDHP. Qualified expenses include dental and vision costs, as well as preventive medications, such as sunscreen, bandages, and lip balm, among others. 

If you withdraw funds from an HSA and don’t use them to pay for qualified medical expenses and you’re under age 65, you’ll have to pay tax on the full withdrawal amount plus a 20% penalty (so don’t do it unless you have a big emergency!) When you reach age 65, you’re allowed to draw from any unspent HSA funds without taxes or penalty if you use them for medical expenses. 

Unused HSA funds roll over from year to year — and your account has the potential to grow until you take future withdrawals. You can also use your HSA to pay for medical expenses for a spouse or other family member — even if they are not covered by your health insurance. If your employer offers an HSA, you can take your account with you when you retire or change jobs. These benefits can make an HSA a useful complement to your retirement plan.

An HSA can be an excellent long-term tax-advantaged investment if you’re healthy and don’t anticipate having many future medical expenses as you age. If you wind up needing long-term care not covered by Medicare, a well-funded HSA may be able to fill any short-term funding gap — giving you and your loved ones peace of mind.