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Top 10 Reasons to Open a Health Savings Account

Lauren Hargrave · May 30, 2024 · 6 min read

why open an HSA

There are many factors to consider when choosing which benefits you want to participate in. For instance, the benefits must meet a need you have and you must be able to afford them. But once you determine the plans clear those hurdles, how do you decide which benefits are really “worth it”? One way is to examine all of the ways the benefit can be used to improve your quality of life. 

In this post, we’ll give you the top ten ways participating in a Health Savings Account (HSA) can improve your quality of life. Let’s get started. 

1. Tax deductions

Contributions to an HSA are made pre tax, which means  that every dollar you contribute to your account reduces your net taxable income for the purposes of calculating your federal income taxes. The lower your net taxable income, the less you pay in federal income taxes. To see how much you could save with an HSA, use our HSA savings calculator.

HSA contributions are taxed on the state level in California and New Jersey, but all other states either treat them as a tax-free contribution, or they don’t collect income taxes from individuals.  

2. Tax-free earnings

As an HSA account holder, you can choose whether you want to keep your contributions in a traditional savings account to earn interest, or whether you would like to invest them in the market. Either way, your contributions will continue to grow and that growth is yours to keep, tax-free.  This is a great reason to invest your HSA contributions in the market if you’re able to. Not only is the average annual return about 10%, but that 10% growth isn’t taxed. It’s allowed to keep compounding (which means even faster growth) until you need to use the money. 

3. Withdrawals for qualified medical expenses are tax-free

If you use your HSA withdrawals for qualified medical expenses like copays, coinsurance responsibilities, deductibles, sick visits, etc., you won’t owe income taxes on that money. That means you could save up to 37% on those expenses, depending on your tax bracket. 

Prior to the age of 65, you must use your withdrawals for qualified medical expenses or else you will not only pay income taxes on the withdrawn amount, but you will also owe a 20% tax penalty. But once you turn 65, not only can you use your HSA balance on anything you want, your distributions for qualified medical expenses remain tax-free. The rest are subject to the appropriate income tax rate. 

4. Portability

You own your HSA, plain and simple. That means your contributions never expire and instead roll over from year-to-year, allowing you to build a medical safety net over time (and allowing your invested earnings to continue to compound and grow). It also means that if you access your HSA through an employer, you get to take it with you if you leave. 

You can also choose to transfer the balance of your employer-sponsored HSA to another HSA that has the functionality you’re looking for. For example, if your employer-sponsored HSA doesn’t offer the opportunity for you to invest your HSA contributions and that’s something you would like to do, you can transfer your HSA balance to an HSA like Lively that does give you that opportunity.

5. Employer contributions

HSAs allow for not only employee contributions, but also those from your employer and anyone else who would like to help you build a health safety net. Every contribution into your HSA during your plan year will count toward the annual limit, which is set each year for individual and family plans by the IRS. If you’re 55 or older, you can contribute an additional $1,000 per year to your HSA. 

6. Lower premiums with High-Deductible Health Plans

In order to qualify to contribute to an HSA, you must be actively enrolled in a High Deductible Health Plan (HDHP) and that must be your only health insurance. The IRS sets the annual deductible and out-of-pocket maximum for individual and family plans to qualify them as HDHPs. 

HDHPs can be either a PPO or HMO as long as they meet the deductible and out-of-pocket max requirements. They also tend to have the lowest annual premiums of any of the traditional health insurance plans. That means HDHP plan participants can use the money they save on their annual premiums and deposit it into their HSA. This gives them more control over how they spend their healthcare dollars.

7. Savings for retirement

An HSA can be used as a strategy to super-charge your retirement savings. That’s because contributions are made tax-free and can be invested and grow tax-free, just like a tax-advantaged retirement account. Once the account holder turns 65, they can start taking distributions from the HSA for everyday life expenses or medical expenses, whichever they need. 

But unlike a traditional tax-advantaged retirement account, distributions made for qualified medical expenses remain tax-free in retirement. Distributions from a traditional tax-advantaged retirement account are always subject to the appropriate income tax rate. And since the average couple retiring now can expect to pay $315,000 for their health costs through the rest of their life, being able to save up to 37% on those costs (since the distributions are tax-free), could help the money they’ve saved go farther.

8. Financial safety net

The fact that HSA balances roll over from year-to-year and can be invested to grow at the rate of the market, account holders have the opportunity to build a financial safety net for the proverbial medical rainy day. Financial experts recommend building an emergency savings in the amount of the out-of-pocket max for your health plan. That way, you’re covered in the event of an unforeseen medical emergency. 

9. Family coverage

Unlike with other types of tax-advantaged health accounts, HSAs offer different contribution levels for individuals and families. This allows account holders with more family members and higher potential health costs to save more money. And as always, if account holders don’t end up needing all of those savings for immediate medical needs, they get to roll them over to the following year.

10. Control over your healthcare spending

When you sign up for an expensive, all-encompassing health insurance plan, you might end up buying coverage for health costs you don’t actually need. But with an HDHP, you pay a lower annual premium and can transfer these savings to your HSA. With an HDHP, certain medical expenses like preventative care are 100% covered even before the deductible has been met, and then you get to choose how the rest of your savings are spent. You can choose which medical care is valuable to you, and use your HSA to pay for it tax-free.

Get Started with Lively today

Lively is your partner in saving for your future. Whether that means investing for retirement, saving for a big-ticket medical procedure, or making sure you can pay for the braces your kid is definitely going to need, you can use our HSA to do it. If you need guidance on how to maximize your account, check out our library of resources and our answers to top HSA questions. Learn more and open your account today. 

Lauren Hargrave

Lauren Hargrave

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

piggy bank on pink background


2024 and 2025 HSA Maximum Contribution Limits

Lively · May 9, 2024 · 3 min read

On May 9, 2024 the Internal Revenue Service announced the HSA contribution limits for 2025. For 2025 HSA-eligible account holders are allowed to contribute: $4,300 for individual coverage and $8,500 for family coverage. If you are 55 years or older, you’re still eligible to contribute an extra $1,000 catch-up contribution.

comparing hsa versus fsa


What is the Difference Between a Flexible Spending Account and a Health Savings Account?

Lauren Hargrave · February 9, 2024 · 12 min read

A Health Savings Account (HSA) and Healthcare Flexible Spending Account (FSA) provide up to 30% savings on out-of-pocket healthcare expenses. That’s good news. Except you can’t contribute to an HSA and Healthcare FSA at the same time. So what if your employer offers both benefits? How do you choose which account type is best for you? Let’s explore the advantages of each to help you decide which wins in HSA vs FSA.

Benefits of HSA employer matching

Health Savings Accounts

Ways Health Savings Account Matching Benefits Employers

Lauren Hargrave · October 13, 2023 · 7 min read

Employers need employees to adopt and engage with their benefits and one way to encourage employees to adopt and contribute to (i.e. engage with) an HSA, is for employers to match employees’ contributions.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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