How to Open an HSA

A health savings account (HSA) allows you to set aside pre-tax money for qualified healthcare expenses. You can set up an HSA account with a bank, investment firm or other qualified financial institution. Many employers also offer access to HSA programs as part of their benefits packages. Here’s what you need to know to open an HSA. If you want to boost your savings to pay for health costs in retirement, a financial advisor can help you create a financial plan for your needs.

What Is an HSA?

A health savings account allows you to set pre-tax money aside in a dedicated account to pay for healthcare spending.

“Pre-tax” means one of two things: If your employer runs this account up for you, then they will reduce your taxable income in the same way that they do with a 401(k). You won’t pay withholding taxes on the money that gets deposited. If you run this account yourself, then you can take the contributions as a deduction when you file your taxes in April. This is an above-the-line deduction, so you can take it even if you claim the standard deduction.

As an example, if you made $50,000 and contributed $3,000 to your HSA, you would only pay taxes on $47,000 of income. This would either be reflected in your weekly withholding or your year-end taxes, depending on whether your employer or you made the contributions.

You can use the money in a health savings account for any qualifying healthcare expense. This generally includes out of pocket costs like deductibles and copayments. As long as you use this money for a qualified expense, you can withdraw it tax free. In this way it works as a combined IRA/401(k) and a Roth IRA. You don’t pay taxes on the money you contribute and you don’t pay taxes on the money you withdraw (including all of the account’s gains).

If you withdraw money from your HSA and don’t spend it on qualifying medical expenses, you have to pay ordinary income taxes on all of it. If you’re under the age of 65, you also need to pay an additional 20% penalty. For this reason many people see these as a retirement vehicle. If you’re over retirement age, an HSA works the same as an IRA or 401(k) in that you contributed to the account with pre-tax money and then pay taxes upon withdrawal.

What Is the Structure of an HSA?

An HSA can be just about any financial account set up by a qualified financial institution so long as it’s dedicated to that purpose. You cannot commingle funds.

This means that you can use a checking or savings account for an HSA if you want, and if you have a bank that will set that account up for you. However, most people use investment portfolios for their health savings accounts. As stated earlier, in this way a health savings account mirrors the structure of a 401(k) or an IRA.

By using a portfolio for your HSA, you can let your money grow more than it would in an ordinary savings account. Depending on how long your account grows before you need the money, it can potentially grow significantly. That can be a real asset when larger healthcare bills come along.

Each year, the IRS allows you to contribute a maximum amount to your health savings account. In 2022, that cap is $3,650 for individuals with an insurance plan that covers only themselves and $7,000 for households with family healthcare coverage.

Requirements To Open an HSA

The first requirement for a health savings account is that you must be enrolled in a high-deductible health insurance plan. You cannot open an HSA if you are uninsured, nor can you open an HSA if you are enrolled in any other form of health insurance plan.

A high-deductible plan is defined as any plan with a minimum deductible of $1,650 in 2025 for individual coverage or $3,300 for family coverage. This means you will spend up to $1,650 or $3,300 before your insurance company begins to cover the cost of medical care.

Note that for many households, the high deductible requirement makes HSAs a bad financial choice. These plans still have monthly premiums, and in some cases, you will spend more contributing to a health savings account than you would to simply get a better health insurance plan. This is not always the case, such as if your employer only offers a high-deductible plan, but look at your options carefully.

If you have a high-deductible plan in place, the next step is to open an HSA. This process is no different from opening any other financial account.

3 Common Ways To Open an HSA

If you’re considering opening an HSA, it’s essential to understand the different ways you can do so and how each option might suit your needs. Here are the three common ways to do it:

Open an HSA through your employer: One of the most common ways to open an HSA is through your employer. Many companies offer HSAs as part of their benefits package, often in conjunction with a high-deductible health plan. When you open an HSA through your employer, contributions can be made directly from your paycheck, allowing you to benefit from pre-tax savings immediately. Additionally, some employers may offer matching contributions, which can further enhance your savings.
Your current financial institution: Second, if you do not have an employer option, contact your financial institutions to ask if they offer health savings account options. You can do this through your bank and any investment brokerages with which you have a relationship. Most will offer an HSA option.
Use an online provider: In today’s digital age, opening an HSA online has become increasingly popular. Online HSA providers offer a user-friendly experience with easy account setup and management. These platforms often provide tools and resources to help you track your healthcare expenses and optimize your savings. Additionally, online providers may offer competitive interest rates and investment options, making them an attractive choice for tech-savvy individuals.

If you open your account, you will make contributions on your own in the same way as any other financial account. In this case, you will then need to deduct your contributions on your taxes to get the full benefit of this account. You do this when you file your year-end taxes.

Bottom Line

A health savings account allows you to save and invest pre-tax money for qualifying medical expenses. As long as you’re enrolled in a high-deductible health insurance plan you can open one with most major financial institutions. A financial advisor can help you understand the tax implications, investment opportunities, and long-term benefits of an HSA. They can also assist in selecting the best option based on your unique financial goals and healthcare needs.

Tips to Pay for Healthcare in Retirement

A financial advisor could help you create a financial plan to pay for healthcare costs in retirement. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Once you’re eligible for Medicare, you lose much of the benefits of an HSA, so you can plan on using that money for your retirement expenses. Learn more about how you can use an HSA to boost retirement savings.