Why HSAs Are Worlds Better Than Regular Savings Accounts

It's important to have a solid emergency fund at all times in case unplanned expenses or circumstances arise. But once your emergency fund is complete, you may wonder what to do with the extra money you have at your disposal.

You may be inclined to put that money into a savings account. However, if you have access to an HSA, or health savings account, you may want to prioritize contributions there. Here's why HSAs are actually far superior to regular savings accounts.

1. You get a tax break on the money you put in

You might earn $5,000 a month and decide to put $300 of that into a savings account. That's all fine and good. But making those contributions won't exempt your $300 a month from taxes.

An HSA will, though. As long as you don't exceed the annual limit set by the IRS, HSA contributions will help reduce your tax burden.

This year's HSA limits are $4,150 for self-only coverage and $8,300 for family coverage. If you're 55 or older, add $1,000 to whichever limit applies to you. So if you're at least 55 years old and funding an HSA at the family level, you might manage to shield $9,300 from taxes this year.

2. You can invest the money you don't pull out right away

The money you keep in a savings account can earn interest for you. These days, the amount of interest you earn might be pretty generous, with many banks paying more than 4.00%.

But with an HSA, you can invest the funds you don't need right away. And you might earn a lot more on your money that way.

The stock market's average annual return over the past 50 years has been 10%. Even if your HSA doesn't do quite as well, you might still grow your money a lot more than you would in a savings account (keeping in mind that today's higher interest rates are far from the norm).

3. Investment gains in HSAs are tax free

When you invest money in a regular brokerage account, gains in that account are subject to taxes. With an HSA, investment gains are tax free.

Now let's compare that to a savings account. You can't invest within a savings account -- you can only earn interest on your money. But the interest you earn is not only taxed, but taxed as ordinary income -- meaning, at the highest rate possible based on your tax bracket.

So let's say you earn $500 in savings account interest this year, and you also gain $500 in your HSA through investments. The $500 from your savings account will add to your tax burden, and you'll lose a chunk of that to the IRS. The $500 from your HSA won't add to your tax liability, and you'll get to enjoy that gain in full.

Of course, not everyone is eligible to fund an HSA. To qualify, your health insurance needs a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage. And your out-of-pocket maximum has to be capped at $8,050 or $16,100, respectively.

As the name implies, HSAs are meant to serve as a savings tool for healthcare costs. So you don't get as much flexibility as with a savings account, since non-medical HSA withdrawals incur a penalty if you take them before reaching age 65.

But HSA funds also don't expire, so you can carry your balance forward as long as you want to. And at age 65 and beyond, the penalty for non-medical withdrawals is waived, so at that point, you can use an HSA like regular savings.

All told, HSAs offer a lot more tax benefits than regular savings accounts. While it's important to have money in a regular savings account for emergency fund purposes, once you're set in that regard, you may want to give your HSA priority over your savings account.