Your Health Savings Account Cheat Sheet | Schwab - Millennium Trust Company

Your health savings account cheat sheet

August 13, 2023
By Millennium Trust

Last month you sliced a finger open while trying to julienne vegetables like a celebrity chef, and this week your son suffered an injury during an ill-advised attempt to go viral on TikTok. Both incidents required visits to an urgent care clinic, totaling $1,000. As a result, the balance of your checking account is down by a third, and the money you put aside for a trip is gone.

The costs for health care, dental, and vision services are some of the most common expenses that can add up — requiring the use of money that is reserved for something else. With a health savings account (HSA), you can pay for planned and unplanned health care expenses and keep your budget on track.

How does an HSA work?

An HSA is a tax-advantaged way to pay for planned and unplanned qualified health care expenses and save for retirement. HSAs are available only to individuals enrolled in high-deductible health plans, which offer lower premiums in exchange for higher deductibles (i.e., out-of-pocket expenses). Unlike flexible spending accounts and other medical savings accounts, funds contributed to HSAs do not expire at the end of the year and the account continues to be available during your retirement.

Contributions to HSAs are tax-free, which reduces your taxable income. Withdrawals for qualified health care expenses are also tax-free. HSA funds earn tax-free interest, and because there is no use-it-or-lose-it policy, unused HSA balances roll over year to year and grow. Plus, HSA funds are portable, so if you switch employers and/or high-deductible health plans, your account — and the money in it — goes with you.

Be mindful of HSA rules and HSA limitations

While an HSA is a helpful tool to pay for health care expenses, there are some details to be aware of:

  • First, each year, there is a limit on the amount you can contribute to an HSA. But there is no limit on the total amount you can save in an HSA over time.
  • Second, if you are under age 65 and withdraw money from your HSA for nonqualified expenses, the amount you withdraw will be subject to federal income taxes, a 20% tax penalty, and any applicable state income taxes. If you are age 65 or older, withdrawals for nonqualified expenses are subject to only federal income taxes and any applicable state income taxes.
  • Third, individuals enrolled in Medicare cannot make contributions to HSAs but can make withdrawals from HSAs.
  • Fourth, for HSAs with a certain minimum balance, a portion of the HSA balance can be invested in mutual funds, stocks, and bonds.

Besides those rules and limitations, the Internal Revenue Service has a few additional requirements for HSA contributors:

  • You must not be enrolled in any other health plans.
  • You must not be listed as a dependent on someone else’s tax return.
  • You may not exceed the IRS annual dollar limit on contributions.
  • You may make withdrawals at any time, but only withdrawals for qualified health care expenses will be exempt from federal and state income taxes and penalties.

Recordkeeping for HSAs

If you decide to open an HSA, it’s important to keep records of the items you purchase with HSA funds. “Each HSA account owner is responsible for using the money for qualified expenses,” says Bryan Levy, managing director, strategy. “Many HSA providers offer tools to support the spending of HSA dollars on qualified expenses, such as debit cards that should be used only to purchase qualified items, providing qualified expense lists, bar code scanners, or links to healthcare providers that aggregate submitted claims to insurance companies.” Keep sufficient records to show that:

  • Withdrawals were used for qualified medical, dental, or vision expenses
  • Qualified expenses were not paid or reimbursed by another source
  • Qualified expenses have been itemized as deductions on tax returns

Best practices

There are a number of services and items that are eligible for qualified health care expenses, including health plan deductibles, co-pays for office visits, laboratory tests, prescriptions, and prescription glasses. Over-the-counter medicines and menstrual care products are now eligible as qualified medical expenses.

Whether you contribute the maximum amount or something smaller, it may help to contribute enough to cover the amount of out-of-pocket health care expenses you expect to pay annually. Consider growing and investing your HSA balance over time so that when major medical expenses happen during retirement, you’ll have tax-free money to help pay for them.

HSAs are a great way to pay for kitchen mishaps, TikTok-related injuries, and other health care expenses with tax-free money. Keep in mind that they are available only to individuals enrolled in high-deductible health plans. HSAs can also be a useful supplement to other retirement plans. Carefully consider whether a high-deductible health plan is right for you before choosing to invest in an HSA.


Looking for an HSA? PayFlex (a Millennium Trust Solution) offers HSAs and other savings solutions for health care expenses.


The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax, or compliance advice and is not specific to health savings accounts offered by PayFlex, which may differ slightly and are subject to fees.

Please select at least 1 category *