How Does An HSA Work And How To Choose One

How to Choose the Best Health Savings Account

Although it would be nice to be an invincible superhero that never gets sick, most of us aren’t so lucky. Since we expect to run into health issues at some point in our lives, choosing to save for that eventuality is a good idea. A health savings account can help you cover medical expenses in an extremely tax-efficient way. But how does an HSA work?

Today we will take a closer look at exactly what a health savings account is, how to pick a health savings account, and if is a good choice to max out your HSA.

What is an HSA and how does an HSA work?

An HSA or health savings account is a useful way to save for medical expenses. You can use the funds in your HSA at any point in your life to cover certain healthcare expenses. You can contribute money tax-free too, and your health savings account and will grow tax-free until you withdraw it to pay for a qualified medical expense.

Essentially, you’ll be able to maximize the value of your earnings by paying for your healthcare expenses with pre-tax dollars. The contributions and earnings will roll over each year, so you aren’t required to spend your savings in a specified period of time.

However, not everyone is able to sign up for an HSA. You’ll only be able to sign up if you are enrolled in a high-deductible health insurance plan.

What can you use an HSA to pay for?

You’ll be able to pay for qualifying healthcare expenses with your HSA. You may be surprised to find out that there are a wide variety of qualifying expenses.

Here are a few expenses your HSA could cover:

  • Physical therapy
  • Mental health services
  • Hearing aids
  • Contact solution
  • Eye doctor exams
  • Glasses
  • Medications
  • Dentist visits and services e.g. Braces
  • Medical supplies
  • Feminine products
  • Breast pumps
  • Chiropractic services

What an HSA can pay for

As you start to use your HSA, you’ll realize that there are many more opportunities to use these funds. Since the guidelines surrounding HSAs change on a regular basis, consult the IRS website to confirm whether or not an item qualifies.

Depending on your HSA, you’ll have a slightly different method of payment.

The first is through a debit card that is directly linked to your HSA. With the debit card, you’ll pay directly out of your HSA with no need to pay out of pocket for an expense.

The second option is a reimbursement from your HSA for qualifying medical expenses. In this case, you would save the receipts for your medical expenses and request a reimbursement after you’ve already paid out of pocket.

HSA pros and cons

As with all financial products, there are some pros and cons that you should be aware of before deciding to open an HSA. Here are the top HSA pros and cons to be aware of.

Pros of an HSA

Let's dive into the pros of having an HSA first.

HSA works as a tax-advantage vehicle

The main advantage of an HSA is that you’ll be able to pay for healthcare costs with pre-tax dollars. With that, you have the potential to save on your actual costs for healthcare.

So you’ll be able to contribute to your HSA with pre-tax dollars. While in the account, the funds will continue to grow tax-free. When you are ready to pay for a qualifying medical expense, you’ll be prepared to take advantage of this tax saving.

HSA works as an emergency fund for medical expenses

Emergencies happen when we least expect them. If you have a medical emergency, then the last thing you want to worry about is how to pay for your medical bills. With an HSA, you’ll have funds ready to cover any medical expenses that may pop up. Consider it a type of emergency fund, if you will.

HSA retirement preparation: Can be invested for retirement

We all need to plan for the future, and that's exactly what an HSA retirement investment will do for you. Since it has a triple tax advantage, it's one of the best ways to plan for retirement. Plus, the money rolls over and accrues interest over the years, so it's a win-win situation for your medical expenses when you need it.

Cons of an HSA

Although there are many benefits of having a health savings account, there are a couple of cons to be aware of.

Penalities for non-medical withdrawals

The money set aside in your HSA is strictly for healthcare expenses. If you need to spend the money on something else, then you’ll be forced to pay a steep fee for the withdrawal. For instance, if you are younger than 65 and use the funds for non-medical expenses, it can cost up to a 20% fee!

Hidden fees

As an investment vehicle, HSAs can have hidden fees embedded in them. Although not all HSAs have crushing fees, it is important to take a closer look at your options before choosing to open an account. Seek out an HSA with low fees.

Strict record-keeping requirements

Since you are unable to spend these funds beyond healthcare expenses, it is important to keep extremely detailed records of your healthcare expenses. Without a clear record of your HSA spending, you could run into a problem with the IRS.

So now that you know the HSA pros and cons, it's time to pick out the best health savings account for you!

How to choose an HSA that works best for you

Overall, an HSA is a useful investment vehicle that could help fund your healthcare expenses. If you have access to an HSA, then it is a good idea to consider funding it each year.

However, it is important to select the best HSA available to you. Find out more about what features to look for below.

Avoid fees

Unfortunately, fees are an all too common feature of many investment vehicles, including HSAs. The fees hidden in a health savings account can wipe out some of the benefits of contributing in the first place.

As you research the accounts available to you, take a close look at the fees associated with the accounts so you can understand how that particular HSA works. Seek out the lowest fees available to maximize the investment return of your HSA.

Look for a range of investment options

You’ll be able to invest the funds you contribute within your HSA. Consider the investment options of the accounts you have available. Make sure that the account you are considering has investment options that you are comfortable with.

If you aren’t sure what type of investments you are comfortable with, then consider taking our risk tolerance quiz.

Avoid investment thresholds

Many investment platforms demand that you contribute a few thousand dollars before you start investing. Many of us are not quite ready to do that yet. Since not everyone has thousands of dollars to invest in their HSA, ensure that the account you are considering doesn’t have an investment threshold.

Pick a convenient withdrawal method

In most cases, a debit card directly connected to your HSA is the more convenient option. After all, who wants to deal with the paperwork trail of a reimbursement. But unfortunately, not all HSAs are set up with a debit card.

If you are against keeping detailed records for reimbursement, then focus on the HSA options that have a debit card attached.

Top HSA platforms to choose from

So, choosing the right HSA with the best features is essential to your financial plan. Here are a few of the top reviewed platforms that offer HSAs:


Since Fidelity is one of the "most trusted wealth companies," it's no wonder they offer one of the best health savings accounts too. Fidelity offers no-fee HSAs, so you have more money in your pocket.

This means no account minimums, no administrative fees, and free debit card use. It offers broad investing options, holistic wealth, and retirement planning.

HSA Bank

HSA bank has been around for over 100 years and "serves over 2 million members with over 5 billion dollars in assets." Since they specialize in health accounts, they are an excellent option for you to start your HSA account.

There is no minimum account balance required to open, and they also offer a debit card to use to access your funds. You can also use your debit card at regional, national, and international ATM networks.

The HSA Authority

The HSA Authority offers fantastic health savings accounts with a range of free features. There is no enrollment fee, minimum balance, or monthly service charge. Plus, you get a free debit card and online bill pay too!

You can contribute to your HSA with automatic deposits, mail-in service, or in person. This is an excellent HSA retirement account with minimal fees that's easy to use.


Lively offers simple and affordable HSA accounts. They state that they believe in being "transparent with their fees and rates," which makes it much easier for you to understand your account.

There is no point of sale fees, funds transfer fees, or excess contribution fees. It's free to open and close an account, plus they offer free monthly maintenance. Another perk? There is no cash minimum to invest.

Bank of America

Bank of America is one of the largest banks in the U.S. Their health savings account offers unlimited online payments, reimbursements, and debit card transactions. However, they do charge a $2.50 monthly service fee.

If your employer offers a payroll deduction, you can set up automatic deposits to your HSA that way. Or you can transfer funds electronically or by mail. You can access your account via the member website or the MyHealth app.

How to contribute to an HSA

So how does an HSA work when it comes to contributions? Well, the IRS determines exactly how much you are allowed to contribute to an HSA each year.

However, not everyone is able to contribute to an HSA. In order to contribute to an HSA, you’ll need to be on a qualifying high deductible healthcare plan. If the HSA is offered by your employer, then you may be able to have these funds directly put health savings account into your account from your paycheck.

That would allow you to automate your savings. But unfortunately, not all employers offer HSAs. If you are unable to contribute to your employer, then you’ll be able to transfer funds electronically or with a check.

How to put your HSA to work and withdraw the funds

Now how does an HSA work when it's time to use the money? The point of saving this money is to help cover any healthcare expenses that life throws your way. So, let’s dive into exactly how you can withdraw your funds from an HSA.

1. Debit card

For some accounts, you will receive a debit card that is directly linked to your funds. When you have a qualifying medical expense, you can use that debit card to pay on the spot.

Before you put any expenses on this card, make sure that they qualify as medical expenses according to the IRS. Otherwise, you could be forced to pay a penalty on your purchase.

2. Reimbursement

If your account doesn’t offer a debit card, then you will be responsible for requesting reimbursements. When you have a qualifying medical expense, you will be required to pay for it out of pocket. After you’ve paid for the expense, you can send the receipt to your HSA provider to receive a reimbursement.

3. Keep records

If you are relying on reimbursements from your HSA, then you should keep very detailed records surrounding your medical expenses. Without detailed records, it could be very difficult to receive reimbursement.

4. The funds will roll over

Don’t feel pressured to spend the funds in your HSA by the end of the year. The funds in this account will roll over into next year. There is no need to spend down the account in order to avoid losing the funds.

Instead, only use these funds when a qualifying medical expense comes up. If you have a string of healthy years, you might be surprised at how quickly your HSA is able to grow.

Should I max out my HSA?

Now you know how an HSA works but should you max it out? An HSA is a great account to cover your future healthcare expenses. Plus, the tax advantages make it a very useful option. Personally, I think maxing out your HSA is a good idea. However, the details of your unique situation could change things.

For example, if you don’t have a solid emergency fund, then you might want to prioritize that savings goal first. Since this account is only for healthcare expenses, you’ll want to have other funds on hand to cover different types of expenses.

Put an HSA to work for you!

An HSA retirement investment is an excellent way to plan for medical costs for the future. It has incredible tax advantages, and your funds will accrue interest if you don't use them. Remember to shop around and find an HSA that works best for you.

Learn more about investing for your future with our completely free "How investing works" bundle! Also, tune in to the Clever Girls YouTube channel, and the Clever Girls Know podcast for more fantastic financial tips!

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