The Difference Between Regular Savings Account and Health Savings Account (HSA)

Savings accounts are great multitaskers, holding onto your deposits for safekeeping, and earning interest to achieve a variety of goals.

But let’s face it, paying to stay healthy can get pretty expensive -- a goal unto itself that may mean building a surplus to pay for medical costs.

Individuals with chronic medical conditions requiring frequent medical care or paying for medication may find it difficult to afford right from the outset.

A health savings account (HSA) is a term you may have heard discussed0 from time to time to save for healthcare.

But is it really worth the effort signing up for an HSA when it basically performs the same function as your trusty regular savings account?

Yes, because health savings accounts and typical interest-driven deposit accounts aren’t the same thing.

While they are both savings accounts, that is where their similarities end.

Learning how savings accounts and HSAs differ can help you find out how to work both into your finances.

What is a Savings Account?

Checking accounts are built for frequent deposits and withdrawals with the purpose of everyday spending in mind; for crossing revolving expenses and bills off your financial to-do list. Money goes in, money goes out.

But, a savings account is that special place to stash your cash, save it, stockpile it, and withdraw it in the future.

Savings accounts are great for building financial discipline because they encourage you to sock away money on a regular basis.

You’ll be surprised how much you can save up over a few months’ time by setting a savings schedule and sticking to it. But a savings account does little good if the money just sits there idle.

Your savings grow by earning interest

This is where interest comes into the picture. It’s one of the most basic features of most savings accounts, and the thing that makes money for both you and your bank.

When you deposit money into a savings account, you’re essentially giving your bank permission to lend it out to other people.

The interest your bank earns on repayment of those loans is in part how it can afford to pay you interest on your deposit accounts -- a thank you for the opportunity to hold onto your money.

As you start earning interest, your interest rate (your APY, or annual percentage yield), ensures that your balance keeps earning and multiplying. This is called compounding: your dividends earn interest, and those dividends earn more interest, and so on.

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In tandem with your savings efforts, your interest rate helps you save for a big ticket purchase, a vacation, or an all-purpose, rainy day fallback fund.

Yet an average savings account may sometimes not be enough in certain cases.

For example, 529 savings accounts are designed to save for college tuition. IRAs are designed to save for retirement. And health savings accounts are specially structured to save for medical costs.

What is a Health Savings Account?

If you have a high deductible health insurance plan, a health savings account is one way to give your savings a boost.

By saving pre-tax dollars for out-of-pocket medical expenses that qualify under your policy, you reduce your financial burden and prevent stretching your dollars too thin.

Say you have a $2,000 deductible that you’re having a hard time meeting. Your insurance won’t start reimbursing you until you reach that deductible, but there are costly expenses you need to pay for and can’t afford.

Your HSA is a savings vehicle to supplement some of those qualifying costs, including:

• Your deductible
• Doctor’s visit co-pays
• Prescription medications
• Medical equipment (wheelchairs, prosthetics)
• Expenses not covered by insurance, such as dental or vision
• Transportation costs (to and from your medical provider)
• Lab fees
• Alternative medicine expenses
• Home improvements (such as repairs to accommodate disability access)

Health savings accounts eligibility

Anyone can open an HSA, either through your employer (if it’s offered), or individually.

To qualify, you’ll need to be enrolled in a high deductible health plan, and you can’t have any other health coverage, like another insurance policy, or Medicare.

How do you know your health insurance is high deductible? According to the Internal Revenue Service, for 2021 the minimum deductible to qualify for an HSA is $1,400 for self-coverage, $2,800 for family coverage.

Contribution limits apply

Although HSAs offer significant savings potential, there are contribution limits (similar to other tax-advantaged accounts).

For the upcoming 2023 calendar year, single-plan individuals can contribute $3,850, and for families, $7,750 -- a $200 and $450 increase, respectively, since last year.

Tax advantages and withdrawal restrictions

Much like its savings sibling, the IRA, arguably the biggest advantage to HSAs is the tax benefits they offer.

HSA deposits are tax-deductible, and the account earns interest and dividends tax-free.

The good news about HSAs is that you can withdraw your funds at any time -- the money rolls over from year to year, so there’s no need to worry about your savings expiring or being wasted.

However, spend the money on anything other than expenses, and you’ll be hit with a 20 percent penalty, plus taxes owed, if you withdraw the case before age 65.

After 65, you’ll get a reprieve from the penalty fee, but you’ll still owe the IRS taxes on your HSA earnings.

Remember that there’s a fine line between what’s eligible and ineligible as a valid HSA expense, so check first with your bank and insurance provider before withdrawing money for something that doesn’t qualify.

According to this list, using HSA funds to reimburse the cost of nonprescription medications, insurance premiums, cosmetic surgery, childcare and other expenses may get you penalized.

How to Get an HSA

You can sign up for your employer’s HSA if it’s offered, but you’re not required to do so.

Finding your own HSA may give you more leverage and control over saving up independently, so your preference may depend on what kind of HSA suits your needs best.

HSA providers can be found through many banks and credit unions; you can begin your search by using the HSASearch database.

Which One Should You Get?

When comparing a standard savings account and a health savings account, there’s nothing wrong with having both. And you should get both because they both serve different purposes that the other can’t fulfill.

A regular savings account becomes your go-to for saving up for general and long-term expenses and offers flexibility to save for anything you want, and contributing and withdrawing how much you want, without penalty.

And while you could use your savings account to save up for healthcare expenses, an HSA is tailored more for those needs. It’s purposely designed for those needs and can’t be used to reimburse other expenses.

Use them together

Get both when there’s no reason to choose between the two. Use your savings account for next year’s summer trip, for example, and your HSA for supplementing your insurance plan; there really is no comparison.

Having a mix of deposit accounts in your financial arsenal is a lot like having a few credit cards.

It’s encouraged to have a mix that diversifies your finances and covers areas of your financial activity that another account can’t.

Say you added retirement and education savings accounts into the mix; the more avenues you have to save, the better.

Conclusion

At first mention, a savings account and health savings account may sound remarkably similar to the point that you might pass on an HSA, thinking that your regular savings account can do double duty. And that’s true.

But look more closely and it becomes clear that an HSA provides too many benefits to pass up on that a regular savings account can’t fill, especially if healthcare costs are an important expense in your life -- and an HSA is ineligible to pay for some of the everyday, go-to expenses that your trusty savings account can cover.

By opening both accounts and contributing regularly, you’ll be working towards improving your health, and the well-being of your finances, too.