Healthcare is a major burden for working Americans and retirees alike. In fact, 82% of employees today see medical expenses as their biggest challenge, according to a study released last year by Willis Towers Watson. It's surprising, therefore, to learn that only 25% rank contributing to a health savings account (HSA) as a top financial priority. In fact, 69% of employees who didn't enroll in an HSA last year say they opted out because they didn't see the benefit or didn't understand how HSAs work.

If you're eligible for an HSA, you should know that by not funding one, you're missing out on a key savings opportunity. And that's something you might regret in the near term as well as retirement.

Man sitting across from smiling female doctor


How HSAs work

An HSA is effectively a hybrid savings and investment account. You can contribute money to an HSA to pay for healthcare expenses as they arise, but you can also take the money in your account you're not using immediately and invest it for added growth.

Many people confuse HSAs with FSAs, or flexible spending accounts. With an FSA, you should only contribute the amount of money you expect to spend on healthcare expenses during your current plan year. With an HSA, you should intentionally contribute more money than what you think you'll need on an annual basis so that you can invest those funds and use them during retirement, when healthcare can be an exceptional burden.

HSA eligibility

Not everyone is allowed to participate in an HSA. You're only eligible if you have a high-deductible health insurance plan, currently defined as $1,350 or more for single coverage or $2,700 or more for family coverage. At the same time, however, your maximum annual out-of-pocket costs must be $6,750 as an individual and $13,500 as a family.

The amount of money you can put into an HSA varies from year to year. For 2019, it's $3,500 for individual coverage and $7,000 for family coverage. If you're 55 or older, you get a $1,000 catch-up on top of whatever limit you qualify for. Furthermore, employers are allowed to make HSA contributions on employees' behalf, though they count toward the aforementioned limits.

Why fund an HSA?

There are plenty of good reasons to contribute to an HSA, the most pressing of which is the tax savings involved. The money you put into your HSA goes in on a pre-tax basis. Then, once invested, that money gets to grow tax-free so that you're not paying taxes on your gains. Finally, HSA withdrawals are taken tax-free provided they're used to cover qualified medical expenses.

Another benefit of funding an HSA is that you get a ton of flexibility with your money once you turn 65. If you withdraw funds for non-qualified medical purposes prior to 65, you get hit with a 20% penalty on the sum you remove. But once you turn 65, you can withdraw HSA funds for any purpose and avoid that penalty. You will, however, pay taxes on your withdrawal.

Furthermore, as mentioned above, HSAs are a useful retirement savings tool. If you carry a balance in your account from year to year, you can keep it invested so that it grows into a larger sum in time for your golden years.

If you've shied away from funding an HSA despite being eligible, it pays to read up on how these plans work. Given that the cost of healthcare is only expected to go up, having a dedicated source of income to pay your medical expenses will come in handy both in the present and in the future.