5 reasons why an HSA is better than you thought

why an hsa

Health Savings Accounts have many advantages, but there is still an air of misunderstanding around some of the main tenets of the account.

One such misunderstanding is the treatment of unused funds. While as many as 20% of participants have said they thought HSA funds are lost at the end of the year, they couldn’t be further from the truth. In reality, unused funds rollover month to month and year to year, like a 401(k). However, the accumulation and spending of funds is not the only use for an HSA. Beyond paying for eligible expenses, HSAs can be leveraged and purposed in many ways.

1. Earn Interest. 

The funds in a Health Savings Account automatically earn interest which accumulates tax-free. When the funds in the account are used (including the interest earned on the funds) they are also tax free, when they are used for qualified medical expenses.

2. Consolidate multiple HSAs.

One of the main advantages of HSAs is that the funds are transferable if a person changes jobs. In this way, they are very similar to a 401(k) arrangement.

If you opened an HSA at one company and then move to a new one, you have the opportunity to consolidate the accounts. You can either do a transfer or a rollover. You read more about both options here.

3. Invest HSA dollars.

Investing usually becomes an option once a certain fund threshold has been met. Depending on the bank that houses the HSA funds, (known as a custodian), the threshold may vary. In most cases, it is between $1,000 and $2,000.

Investing HSA funds can be very rewarding. According to data from Devenir Research’s 2022 Midyear HSA report, over 2.4 million HSAs have invested at least a portion of their HSA funds. Ultimately this represents over 7% of all accounts.

4. Designate a beneficiary.

To ensure that your HSA remains a tax-free vehicles for others, you will want to designate a beneficiary for the account. Most custodians will offer a form allowing you to list whom you would like the funds to be passed on to.

5. Save on lower cost options.

Buying a generic brand to save money is a well known cost control tactic. However, when you purchase a generic brand item with money from an HSA, you save twice. Once because of the low cost of the item, and then again because you are using tax-free money.

That being said, you can only purchase qualified health or medical items with the money in your HSA. To look up eligible expenses, check out this eligibility list.