Do You Need an HSA?

An HSA is a type of savings account that you can open if you are covered by a high-deductible health insurance plan. In 2026, that means an insurance plan with a deductible of at least $1,700 for an individual or at least $3,400 for a family.

You can’t open an HSA if you are enrolled in Medicare. You also can’t be claimed as a dependent on someone else’s income-tax return.

You can deposit money in an HSA and then withdraw those funds to pay for qualified medical costs, such as visits to the doctor, treatments in a hospital, prescription medications and mental health services.

Tax advantages of an HSA

One of the important benefits of an HSA is that contributions to one are federally tax-deductible. This means that every deposit you make reduces your taxable income, which will lower the amount of taxes you owe each year.

Say you earn $80,000 each year at your job. If you deposit $3,000 in an HSA throughout the year, your taxable income will fall to $77,000, reducing the amount of income taxes you’ll pay.

HSA withdrawals that you make for medical care, medical equipment, copayments, vision care, dental care and other qualified medical expenses are also tax-free.

Be careful, though, when withdrawing money from an HSA. If you take funds out of your HSA for anything other than a qualified medical expense, you will pay income taxes on that withdrawal. If you are under the age of 65, you’ll also pay a 20% withdrawal penalty tax on what you withdrew.

Once you hit 65, you can use the money in your HSA for nonqualified expenses without having to pay the 20% tax penalty, though you will still have to pay income taxes on the withdrawal.

In 2026, you can contribute a maximum of $4,400 to an HSA for yourself and up to $8,750 for family coverage. You can contribute an extra $1,000 catch-up contribution if you are 55 or older.

Earning interest

HSA accounts earn interest, which means that you can use them to build wealth.

Say you contribute $3,000 annually to an HSA that earns an average annual return of 5%. If you withdraw $1,000 each year to cover medical expenses, your account would grow to about $66,000 after 20 years. Of this balance, $26,000 would be earnings generated by the interest that your account accumulates.

Should you open an HSA?

If you have the money to fund it, opening an HSA is a good way to cover medical expenses, reduce your taxable income and earn interest. The key is to put enough money into your account each year and to only use the funds in it on qualified medical expenses.

You can open an HSA through a bank or credit union. Your employer might also offer one of these accounts. Ask your human resources department about your options.

Of course, this is just a summary; there are other provisions you should know about. And there may be other ways to pay for medical care in your situation. Work with qualified financial professionals to discuss your specific circumstances.