Whether you're in your 20s, 40s, or nearing retirement age, you're no doubt aware that healthcare is an expense you should expect to grapple with. And it pays to do what you can to make healthcare as affordable as possible.

A good way to pull that off is to find ways to save for healthcare in a tax-advantaged manner. And health savings accounts, or HSAs, let you do just that.

If you're not too familiar with HSAs, there's probably a reason for that. First of all, these accounts are only available to a limited number of people because eligibility for one hinges on having a compatible health insurance plan. Second, there tends to be some confusion around HSAs, and that may have led you to write one off.

A doctor talking to a seated person.

Image source: Getty Images.

Thankfully, HSA balances among participants seem to be growing nicely. Data from the Employee Benefit Research Institute found that between 2011 and 2021, average end-of-year HSA balances increased from $1,990 to $4,318.

Still, there are no doubt plenty of people out there who are eligible for an HSA but aren't taking advantage of one. If that's the boat you're in, it pays to look into one of these plans for the multiple benefits involved.

Can you open an HSA?

To participate in an HSA this year, your health plan needs to meet these criteria:

  • Have a minimum deductible of $1,500 for self-only coverage or $3,000 for family coverage
  • Have an out-of-pocket maximum of $7,500 for self-only coverage or $15,000 for family coverage

If your plan doesn't meet these requirements, you can't fund an HSA. You also cannot contribute to an HSA if you're enrolled in Medicare.

Why open an HSA?

HSAs are the only savings plan to offer three distinct tax benefits:

  • Contributions are tax-free
  • Funds not withdrawn to cover medical spending can be invested, and gains on investments are tax-free
  • Withdrawals are tax-free, provided they're used for qualified healthcare expenses

Let's compare an HSA to, say, a Roth IRA. With the latter, you get tax-free investment gains and withdrawals but no tax-free contributions.

You may be thinking, "But an HSA isn't a retirement plan like a Roth IRA." But actually, it could be considered one.

HSAs are extremely flexible in that you can carry your money forward as long as you'd like. And once you turn 65, you can take an HSA withdrawal for any purpose -- even if it's not to cover a medical bill -- without being penalized (though in that case, your withdrawal will not be tax-free).

That being said, many seniors find that healthcare becomes their largest ongoing expense once they retire, surpassing even housing. So chances are, if you bring a larger HSA balance with you into retirement, you'll wind up spending it on medical bills in one way or another. And remember, HSA funds can also be used to cover your Medicare expenses -- you just can't fund an HSA as a Medicare enrollee.

All told, there's lots to be gained by participating in an HSA if you're able to do so. And you don't need an employer to sponsor one for you. So if your health insurance plan is compatible with an HSA, go out and open a plan on your own if the company you work for doesn't make one available.