It can be challenging to navigate all the unknowns that come with managing health costs and choosing a healthcare plan, especially for families. High-deductible health plans, or HDHPs, have gained popularity for their unique health savings benefits, including the ability to open a Health Savings Account (HSA), which can reduce your medical costs.
What is an HSA?
An HSA is a tax-advantaged savings account that allows you to save and pay for qualified medical expenses that aren’t covered by your HDHP.
HSAs are offered as part of a health insurance package, typically through employer-provided benefits or separate health coverage. They aren’t offered by Ally Invest or other brokerages.
How does an HSA work?
With an HSA, contributions, earnings and distributions put toward qualified expenses are not taxed, which can help you reduce your overall annual health-related costs. Unused funds roll over year to year and accumulate for future use.
Who can contribute to an HSA?
Any eligible individual covered by an HDHP can contribute to an HSA. Their employer or family members can also make contributions to the account.
How much can you contribute to an HSA?
Similar to tax-advantaged retirement accounts, the IRS sets annual contribution limits for HSAs. For 2026, the limit for individual coverage under an HDHP is $4,400, and for families, $8,750. You can use savings buckets in an Ally Bank Savings Account to set aside any additional money for health expenses.
What are eligible expenses for HSA funds?
Eligible expenses can vary by plan, but they typically include:
Deductibles
Copays
Coinsurance
Dental care
Vision care
Prescription drugs and over-the-counter medications
Lab tests and x-rays
Medical equipment
Taxes and advantages
HSAs offer several tax benefits, including:
Tax-deductible contributions (or pre-tax if made through payroll)
Tax-free growth on earnings
Tax-free withdrawals when used for qualified medical expenses
HSA vs. FSA: What’s the difference?
Both HSA and Flexible Spending Accounts, or FSA, are accounts that let you set aside pre-tax funds for qualified healthcare expenses. The biggest difference between the two is that FSAs have a “use it or lose it” rule, meaning you must spend your FSA funds within your plan year or its grace period, or you forfeit them. You also lose your funds if you leave your job.
With an HSA, your funds remain available to you from year to year. An HSA is also a portable account, so it remains open and the funds available, even if you change jobs.
Checklist before you open an HSA
Prior to opening an HSA:
Confirm if you’re eligible for an HDHP and your enrollment status
Compare HSA contribution limits and note any contributions made by your employer
Review your HSA provider fees, investment options and mobile tools to manage your funds
Decide whether to prioritize contributions to an HSA or other savings or pre-tax retirement accounts
How to open and manage an HSA
If you receive health insurance benefits from your employer, you may be able to enroll in an HDHP through your benefits provider. You can also find HDHPs within the HealthCare.gov marketplace. HSAs are often paired with HDHPs, but depending on your plan, you might have to open one separately at a financial institution that offers them.
To open an HSA:
Verify eligibility
Select a provider
Set up regular contributions
How to maximize your HSA
Even if you can’t set aside the maximum amount in an HSA, you should consider contributing what you can since HSAs are tax-advantaged, reducing your overall healthcare costs.
You may also choose to invest your HSA funds, similar to your 401(k) or IRA. You could lose money, but any earnings you make will grow tax-free and can be withdrawn tax-free when put toward qualified expenses.
HSAs can also be a part of your retirement plan. If you aim to retire early, an HSA can help pay for medical expenses until you qualify for Medicare coverage. Then once you turn 65, you can use any remaining HSA money to pay for Medicare premiums, long-term care, and other healthcare costs. You can even use the money on non-medical expenses, although you will need to pay state and federal taxes on those distributions.
Pros and cons of an HSA
Explore the advantages and disadvantages of this type of account:
Pros:
Triple tax advantages
Funds roll over from year to year
Account is portable and not connected to one employer
Funds can be invested
Helps cover medical costs and build retirement health savings
Cons:
Must be enrolled in an HDHP
Potential for high out-of-pocket expenses if you need care before you’ve saved
Penalties for nonqualified withdrawals before 65
An account for your health
Medical expenses can be a significant source of stress for individuals and families. A health savings account can help you save money and help you prepare in the event of a medical emergency.
