How to Manage Medical Bills and Maximize Your HSA

Individuals enrolled in high-deductible health plans (HDHPs) can manage healthcare costs and reduce taxable income by utilizing a Health Savings Account (HSA). These accounts are designed to work in tandem with HDHPs, providing a tax-advantaged method for saving and spending on qualified medical expenses.

According to data from the Center on Budget and Policy Priorities, total HSA contributions exceeded $70 billion in 2023, reflecting the growing use of these accounts for financial planning and healthcare management.

The Triple Tax Advantage

HSAs are characterized by what is described as a triple tax benefit for federal taxes. First, contributions to the account are made pre-tax, which reduces the owner’s overall taxable income. Second, any funds within the account grow tax-free. Third, withdrawals used to pay for qualified medical expenses are also tax-free.

Qualified expenses eligible for tax-free withdrawal include not only general medical costs but also dental care and vision services.

Eligibility and 2026 Requirements

To be eligible to contribute to an HSA, an individual must be enrolled in a high-deductible health plan. For the year 2026, these plans require a minimum deductible of $1,700 for an individual or $3,400 for a family.

Contributions to these accounts are typically handled via payroll deductions and may include contributions provided by an employer. However, these contributions must remain within the annual limits set by the IRS.

Strategies for Maximizing HSA Funds

There are different approaches to managing HSA contributions depending on whether the goal is immediate coverage or long-term financial security. One strategy involves contributing enough to the account to cover the estimated out-of-pocket medical expenses for the following year or more.

For those seeking long-term benefits, contributing the maximum annual amount and investing those funds can serve as a tool for future healthcare needs and retirement planning.

Contributing the maximum annual contribution and investing for the long term is the best way to get the most benefit from your HSA.

Roger Young, CFP®, T. Rowe Price

Risks and Limitations

While HSAs offer significant flexibility, they are not intended to function as general emergency funds. Using HSA funds for nonqualified withdrawals can lead to financial penalties.

Withdrawals that are not used for qualified medical expenses are subject to ordinary taxes and may also incur additional penalties.

Financial experts suggest that the decision to choose an HDHP should be based primarily on an individual’s specific insurance needs before considering the associated tax advantages of the HSA.