Your HSA Is More Than Just Another Bank Account. Here's Why

Healthcare expenses unfortunately have the potential to rise at any time. And if you're not prepared for them, you risk falling victim to medical debt -- an issue a whopping 20 million Americans currently face.

That's why it's so important to have funds set aside for medical care at all times. And in that regard, you may have a few different options. You could always put money into a regular savings account and dip in as needed to cover medical expenses. Or you could fund an HSA, or health savings account.

If you're not so familiar with HSAs, you might think, "Why bother?" After all, if you already have a savings account open, you might assume that continuing to fund it is just plain easier. Plus, to be fair, with a regular savings account, you don't face any restrictions. You can take withdrawals at any time or for any reason without risking a penalty, whereas HSAs have rules you need to follow as a participant.

But HSAs offer benefits well beyond what savings accounts offer. So it pays to consider one if you're eligible.

The upside of having an HSA

The money you put into a savings account does not result in any sort of tax break. But HSA contributions up to the annual limits set by the IRS go in tax-free. So by funding an HSA, you're exempting a portion of your income from taxes.

As just one example, let's say you manage to put $2,000 into a savings account this year. From an IRS perspective, you gain nothing. If you put $2,000 into an HSA and fall into the 22% tax bracket, it means you save yourself $440 in taxes this year.

Also, with a savings account, you'll earn interest on your money. And at times, that can be lucrative, depending on what banks are paying.

But HSAs let you invest the money you don't need right away. And those gains are yours to enjoy tax-free. Given that the stock market has generated an average annual 10% return over the past 50 years, this means that if you put $2,000 into an HSA this year but don't withdraw that money for 10 years, it could grow to be worth almost $5,200.

Finally, HSA withdrawals are tax-free when used to pay for qualifying healthcare expenses. Savings account withdrawals are technically tax-free, too. It's not like the IRS is going to come after you for money if you remove $100 from savings to pay for concert tickets. But the interest you earn in your savings account is taxed. So if you earn $100 in interest this year and fall into the 22% tax bracket, you might lose $22 of that to the IRS.

One thing to know about HSAs is that non-medical withdrawals are subject to a very costly 20% penalty. Plus, you'll face taxes on withdrawals of that nature. But if it's any consolation, that 20% penalty (not the tax portion) is waived once you turn 65. So if you end up with a very large HSA balance over time, come retirement, you get more options for spending it.

Are you eligible for an HSA?

As you can see, HSAs offer a world of benefits. So if you're going to save for healthcare expenses, it pays to put money into one rather than just stick to a regular savings account.

First, though, you'll need to see if you're eligible for an HSA, since not everyone is. To fund an HSA, your health insurance plan needs to have:

• A minimum deductible of $1,600 for self-only coverage, or $3,200 for family coverage
• An annual out-of-pocket maximum of $8,050 for self-only coverage, or $16,100 for family coverage

These limits apply to 2024, and they have the potential to change from year to year, so be mindful of that. But it pays to see if your health insurance plan is compatible with an HSA. You may find that an HSA helps you save money on taxes and enjoy nice tax-free gains along the way. Just as importantly, you may find that keeping money in an HSA allows you to avoid medical debt both in the near term as well as in the future.