Health Savings Accounts: Advantages and Disadvantages

HSAs are portable and offer tax advantages, but have some drawbacks

A health savings account (HSA) is like a personal savings account, but it can only be used for qualified healthcare expenses. To be eligible, you must be enrolled in a high-deductible health plan (HDHP). HSAs also have tax advantages, but there are some disadvantages to consider.

Key Takeaways

  • A health savings account (HSA) can help people with high-deductible health insurance plans cover their out-of-pocket costs.
  • Contributions to HSAs aren't subject to federal income tax, and the earnings in the account grow tax-free.
  • Unspent money in an HSA rolls over at the end of the year, so it's available for future health expenses.
  • You'll owe income taxes plus a 20% penalty if you withdraw funds from your HSA for non-qualified expenses before you turn 65. Once you're 65, you'll owe taxes but not the penalty.
  • High-deductible health plans, which are a requirement for HSAs, aren't always the best option, especially for those who expect to have significant healthcare expenses in the future.

Pros And Cons Of A Health Savings Account

The Advantages of Health Savings Accounts

The following includes the advantages Health Savings Accounts offer.

Many Expenses Qualify

Eligible expenses include a wide range of medical, dental, and mental health services. They are explained in detail in IRS Publication 502, Medical and Dental Expenses.

As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in 2020, over-the-counter medications and menstrual products are now qualified HSA expenses.

Others Can Contribute

Contributions can come from you, your employer, a relative, or anyone else who wants to add to your HSA. The IRS does, however, set limits.

For 2021, the limit is $3,600 for individuals and $7,200 for families plus an additional $1,000 "catch-up" contribution for anyone age 55 or older by the end of the tax year. For 2022, the limit will rise to $3,650 for individuals and $7,300 for family coverage—about 1.4%. There is no change in the catch-up contribution amount for 2022.

Pretax Contributions

Contributions are typically made with pretax dollars through payroll deductions at your employer. As a result, they are not included in your gross income and are not subject to federal income taxes. In most states, contributions are not subject to state income taxes.

Tax-Deductible After-Tax Contributions

If you make contributions with after-tax dollars, you can deduct them from your gross income on your tax return, reducing your tax bill for the year. For example, if you're an individual under the age of 55, your maximum allowed contribution in 2021 is $3,600, with a slight increase to $3,650 in 2022.

If you only deposit $2,600 into your HSA through payroll deductions by the end of the year, you may choose to deposit an additional $1,000 to lower your tax liability. You generally have until the respective IRS tax filing deadline to contribute.

Tax-Free Withdrawals

Withdrawals from your HSA are not subject to federal (or in most cases, state) taxes if you use them for qualified medical expenses. However, HSAs can be used as investment accounts, allowing you to purchase stocks and other securities to potentially boost your returns.

Note, investing in stocks and other securities within your HSA carries potential loss and is not recommended for everyone.

Investing in stocks carries the risk of loss of principal, and should only be considered as part of a diversified, long-term wealth-building strategy. It would be wise to seek the advice of a financial planning professional before taking such actions.

Tax-Free Earnings

Any interest or other earnings on the money in the account is tax-free. Most HSA accounts earn a minimal amount of interest, less than 0.1%.

Annual Rollover

If you have money left in your HSA at the end of the year, it rolls over to the next year. This offers more flexibility than Flexible Spending Accounts (FSAs), which normally can only be carried over in an amount up to $550 or 2.5 months into the following plan year.


The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, go to work for a different employer, or retire. Essentially, your HSA is a bank account in your name, where you decide how and when to use the funds.

HDHPs are required to set a minimum deductible and a maximum for out-of-pocket costs. In 2021 and 2022, the minimum deductible is $1,400 for an individual and $2,800 for a family. In 2021, the maximum for out-of-pocket costs is $7,000 (individual) and $14,000 (family), rising slightly to $7,050 and $14,100 for 2022.


Most HSAs issue a debit card, so you can pay for prescription medications and other eligible expenses right away. If you wait for a medical bill to come in the mail, you can call the billing center and make a payment over the phone using your HSA debit card. You can alternatively reimburse yourself out of an HSA if you have paid a medical bill with an alternative form of payment.

The Disadvantages of Health Savings Accounts

If you qualify for an HSA, below are some of the disadvantages to consider.

High-Deductible Requirement

A High-Deductible Health Plan, which you are required to have to qualify for an HSA, can put a greater financial burden on you than other types of health insurance. Even though you will pay less in premiums each month, it could be difficult—even with money in an HSA—to come up with the cash to meet the deductible for a costly medical procedure. This is something to consider for anyone who knows they will have hefty medical bills in a particular plan year.

The deductibles for HDHPs are often significantly higher than the minimums required and can be as high as the maximum out-of-pocket costs allowed.

Pressure to Save

Some people may be reluctant to seek healthcare when they need it because they don't want to spend the money in their HSA account.

Taxes and Penalties

If you withdraw funds for non-qualified expenses before you turn 65, you'll owe income taxes on the money plus a 20% penalty. Once you're 65, you'll owe taxes but not the penalty.


You must keep receipts to prove that your withdrawals were used for qualified health expenses. This will be necessary if you are audited by the IRS.


Some HSAs charge a monthly maintenance fee or a per-transaction fee, which varies by institution. While typically not very high, the fees are almost certainly higher than any interest the account may earn and do cut into your bottom line. Sometimes these fees are waived if you maintain a certain minimum balance.

What Is the Main Benefit of a Health Savings Account?

The main benefit of a health savings account (HSA) for many people is the ability to save on taxes. An HSA account is a tax-advantaged account, which means that holders of HSAs enjoy certain types of tax benefits. For example, you can claim a deduction on your tax return for your HSA contributions regardless of whether or not you itemize your deductions. You can also claim a tax deduction if someone other than your employer makes a contribution to your HSA.

If your employer contributes to your HSA, these contributions may be excluded from your gross income. This includes contributions you receive via a cafeteria plan. Any distributions you take from your HSA that you use to pay for a qualified medical expense are not subject to taxation. Another big tax benefit is that you will not have to pay taxes on the earnings and interest you receive from the assets you hold in your HSA.

What Is the Main Downside of an HSA?

The main downside of an HSA is that you will have a health insurance plan with a high deductible. A health insurance deductible is the amount of money you will need to pay out-of-pocket each year before your insurance plan benefits begin. You will be responsible for coming up with the cash to pay for your deductible before your insurance plan will begin paying for your healthcare costs. This means you'll need to pay for visits to the doctor, medical procedures, and prescriptions until you satisfy your deductible.

In 2021 and 2022, you'll need to pay a deductible for an HSA of at least $1,400 for an individual and $2,800 for a family. Some plans have higher deductibles and you'll also need to factor in additional plan costs, such as copays. If you anticipate needing to use your health insurance for expensive procedures—such as treatment for a chronic illness or surgery—you'll need to initially pay upfront for these costs until you satisfy your deductible. If you would find this financially difficult, you might want to look at different types of healthcare plans that offer a lower deductible.

What Are the Main Benefits of a High Deductible Medical Plan With a Health Savings Account?

The main benefits of a high deductible medical plan with a health savings account (HSA) are tax savings, the ability to cover some expenses your insurance doesn't, the ability to have others contribute to your account, and the convenience of using the account to pay for healthcare expenses. Another benefit of an HSA is the portability of the funds in your account. This means that you can rollover any funds left in your account at the end of the year to the following year.

Unlike a flexible spending account (FSA), you are not required to use the money in your HSA by the end of the calendar year. The money is yours forever even if you decide not to use it for healthcare expenses. You can allow the money to grow and can keep the funds in an HSA even if you change funds or retire. In fact, some people use their HSA as part of their retirement planning.

How Do I Check the Balance on My Health Savings Account?

Most financial institutions that provide health savings accounts will offer their customers various ways to check their account balances. These include:

  1. Sign in online. Your HSA provider will require you to set up an online account on their website, just as you would for an online bank or brokerage account. Once you've set up your account, you'll be able to log into the member portal and view your account statements, balance, and transactions.
  2. Review your printed statement. Some people prefer to have a printed copy of their account statements mailed to them by their HSA provider. If you choose this option, you'll find your balance along with all your recent transactions included in your statement.
  3. Use an app on your smartphone. Check to see if your HSA provider offers an app that allows you to conveniently check your account balance from your phone.
  4. Call customer service. Your HSA provider will have a customer service number you can call for assistance in a variety of issues, including answering questions and inquiring about your account balance.

The Bottom Line

If you are enrolled in a high-deductible health plan, the tax advantages of an HSA and the ability to roll over unspent money are appealing. But high-deductible health plans aren't always the best option, especially if you expect to have significant healthcare expenses.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. "Health Savings Account (HSA)." Accessed Dec. 28, 2021.

  2. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: Reporting Distributions on Your Return.” Accessed Dec. 28, 2021.

  3. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: Distributions From an HSA." Accessed Dec. 28, 2021.

  4. Internal Revenue Service. "Publication 502, Medical and Dental Expenses: What Medical Expenses Are Includible?" Accessed Dec. 28, 2021.

  5. U.S. Congress. "S.3548 - CARES Act, Section 4402." Accessed Dec. 28, 2021.

  6. Internal Revenue Service. "IRS Outlines Changes to Health Care Spending Available Under CARES Act." Accessed Dec. 28, 2021.

  7. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans," Pages 6–7. Accessed Dec. 28, 2021.

  8. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: Reporting Contributions on Your Return.” Accessed Dec. 28, 2021.

  9. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: When to Contribute.” Accessed Dec. 28, 2021.

  10. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: Distributions From an HSA.” Accessed Dec. 28, 2021.

  11. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: What Are the Benefits of an HSA?” Accessed Dec. 28, 2021.

  12. Internal Revenue Service. "Additional Relief for Coronavirus Disease (COVID-19) Under § 125 Cafeteria Plans," Page 13. Accessed Dec. 28, 2021.

  13. “What Are HDHPs & HSAs?” Accessed Dec. 28, 2021.

  14. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans," Page 5. Accessed Dec. 28, 2021.

  15. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: Deemed Distributions From HSAs.” Accessed Dec. 28, 2021.

  16. U.S. Securities and Exchange Commission. “Investor Bulletin: Health Savings Accounts (HSAs).” Accessed Dec. 28, 2021.

  17. Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans: What Are the Benefits of an HSA?" Accessed Dec. 28, 2021.