What is the difference between a Health Savings Account (HSA) and a regular savings account that I might set up through my bank?

I presume that withdrawals from an HSA can only be made for health expenses, but if I am conscientious about saving for health expenses, is there any advantage from a financial perspective for keeping my money in an HSA, rather than a bank savings account?


Some high-level differences (there are other specific details regarding qualification and taxability, but these are the major points):

  • Contributions to an HSA are tax-free
  • Withdrawals for qualified medical expenses are tax-free; non-qualified withdrawals are subject to taxes and penalties
  • Contributions are limited to $3,400 per year for an individual ($6,750 for a family)
  • Employers can make contributions as well (they count toward the above limit)
  • You must have a high-deductible health plan, no supplemental health insurance, and not enrolled in Medicare.

So if you qualify, the main benefit is a reduction in taxable income.

  • I assume that withdrawals are subject to tax too? – Thunderforge Oct 24 '18 at 22:29
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    Contributions, growth, and withdrawals are all tax-free (except state income tax in CA, AL, and NJ, and some growth caveats in NH and TN). – Kevin Oct 24 '18 at 22:29
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    One benefit of using an HSA from your employer is that the contribution directly from your paycheck isn't subject to social security and Medicare taxes. These taxes can be as much at 7.65%. – mhoran_psprep Oct 25 '18 at 1:29
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    My rejected edit raised a critical point that you are penalized 20% for non-qualified withdrawals. This is directly relevant to the OP's question about the differences between a savings account and a HSA. It is not risk free to place money in an HSA; you are committing it in advance to medical expenses. – user71659 Oct 25 '18 at 1:33
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    One other point: Upon reaching the age of 65, the HSA doubles as a retirement account (but withdrawals are still taxed unless qualified for the medical exemption). Essentially, the non-tax penalties cease to apply. As a result, it is suitable for anyone who has already maxed out their other retirement vehicles. – Kevin Oct 25 '18 at 3:46

When it comes to saving for medical expenses, you can save some in an HSA or you could save it in some other investment like a bank account. The optimal choice involves complex considerations. Some are:

  • Contributions to an HSA requires you to have a high-deductible health plan. The HDHP will have, generally, lower premiums than a plan with low deductible, but it may not be always true. Depending on your employer's benefits and your utilization, the HDHP may not be the best option.

    For example, my former employer ran a medical system. The plan that restricted you to their facilities had no deductible, and had the lowest premiums.

  • Contributions and withdrawals for qualified medical expenses from an HSA are tax-free. This is the main benefit over the savings account. However, note that medical expenses over 10% AGI (2019, was 7.5% 2017-2018) are deductible anyway. Thus, if your AGI is low, the advantages of a HSA go down.

  • HSAs are held in insured bank accounts, essentially checking accounts, so any interest paid is miniscule. Worse, custodians can charge monthly fees, check fees, statement fees, etc. Other investments may have better returns, offsetting tax benefits.

  • Non-qualified withdrawals count as ordinary income plus a 20% penalty (with limited exceptions), and, unlike 401(k)s, you cannot borrow against it. If you no longer have an HDHP, the money still remains in the HSA. This will pose a problem if you find you need the money for something else.

In sum, saving money in an HSA may or may not be the best thing for you. You really have to consider a large number of factors, and unfortunately, you have to try to predict your future situation.

  • At retirement age the non-qualified withdrawal penalty goes away. Even before then you could match contributions to what you paid the prior year in qualified medical expenses so you could withdraw entirely at any point down the road, since there is no deadline for reimbursements so long as the HSA was established prior to when the expenses were paid. – Hart CO Oct 25 '18 at 14:24
  • 1. Having a low deductible plan with cheaper premiums than a high deductible plan is a very unusual situation. 2. If your AGI is so low that your medical deduction would be more than your tax savings with an HSA, you probably aren’t using itemized deductions. The HSA deduction can be taken even with the standard deduction. 3. HSAs can certainly be found with no fees, if your intent is to spend the money on medical expenses. If your intent is to use it as another investment vehicle for retirement, there are HSAs for that, too. – Ben Miller Oct 26 '18 at 12:49
  • 4. “Borrowing” IRA money using the 60 day rollover rule is risky and not recommended. But if you decide you are going to do it anyway, HSAs have the same 60 day rollover rule. – Ben Miller Oct 26 '18 at 13:52
  • @BenMiller Mistake: I meant 401(k) not IRA. And with regards to HDHP, it all depends on the costs and your utilization, if HDHPs were optimal or desired in every situation, they would be the only plan available. – user71659 Oct 26 '18 at 17:24

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