Healthcare is one of the greatest expenses Americans face, both during their working years and in retirement. As such, it pays to try to make that care as affordable as possible. One way to do so is to save for it in an HSA, or health savings account.

An HSA is a tax-advantaged savings/investment plan that lets you sock away money specifically for healthcare purposes. To participate in an HSA, you must be enrolled in a high-deductible insurance plan, which means an annual deductible of $1,350 or more for single coverage and $2,700 or more for family coverage.

Glass jar filled with coins sitting on a wooden surface labeled health, with a felt red heart resting against it.


The money you contribute to an HSA goes in on a pre-tax basis, which means you get to reap some tax savings upfront. Currently, you can contribute up to $3,500 to an HSA as an individual, or up to $7,000 for a family. You can also make a $1,000 catch-up contribution if you're 55 or older.

Once you contribute to an HSA, you get the option to invest that money so that it grows into a larger sum over time. While you can access that money from year to year to pay for healthcare expenses that arise, your goal in funding an HSA should be to leave some money over to benefit from long-term growth. This way, you'll have funds to tap in retirement to cover healthcare. Furthermore, the money you invest gets to grow on a tax-free basis, and the withdrawals you take to pay for qualified medical expenses are tax-free, as well.

At this point, you may be thinking: "What's not to love about an HSA?" And the truth is, these accounts are really useful. Still, there are a few HSA drawbacks you should know about.

1. You'll face steep penalties for non-medical withdrawals

The purpose of an HSA is to save for healthcare expenses, so the IRS doesn't take kindly to withdrawals for non-medical purposes. If you remove funds from your HSA prior to age 65 for something other than a qualified medical expense, you'll be hit with a 20% early withdrawal penalty. That's double the 10% early withdrawal penalty associated with removing funds prematurely from an IRA or 401(k).

In addition to that penalty, you'll be taxed on the amount you withdraw for non-medical purposes. This holds true at any age. However, if you take a withdrawal for non-medical purposes after reaching 65, that nasty 20% penalty won't apply.

2. You'll need to keep meticulous records of your medical spending

Some HSAs issue debit cards that allow you to pay for medical expenses on the spot using the funds in your account. Others require you to pay for those costs yourself, and then submit a claim for reimbursement. Either way, if you're going to use an HSA, you'll need to be really careful about retaining copies of medical receipts, since you'll need to prove that your withdrawals were taken to cover qualified costs. As such, you risk losing that documentation and running into trouble, or you just plain might find it to be a hassle.

3. You may be charged fees for having an HSA

Some HSAs charge a general account fee that you'll have to pay on what's usually a monthly basis. Others charge a fee for each transaction you make. These fees can eat into the savings you'll reap from having an HSA in the first place. That said, it's pretty hard to find a no-fee tax-advantaged savings account. Employer-sponsored 401(k)s, for example, are notorious for charging hefty administrative fees on top of investment fees, and IRAs, though less expensive from an administrative standpoint, charge investment fees, as well.

Let's be clear: HSAs are a useful savings tool and there are plenty of good reasons to open one. Just be aware of the drawbacks involved and make smart choices to avoid losing money to penalties needlessly.