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You’ll Spend Thousands on Healthcare This Year. Can an HSA or HRA Help?

The average annual healthcare expense per individual rises from roughly $2,000 for 19-year-olds to about $11,000 for retirees (age 65+).1 As Americans pay more for medical care, they often seek ways to save for emergencies. Health savings accounts (HSAs) and health reimbursement accounts (HRAs) can help. 

What are these accounts and who has access to them? We explore the pros and cons of each option to help you determine which you may have access too and the best one for your individual needs.

What Is a Health Savings Account?

An HSA can be used to save for future medical costs. They tend to have multiple tax benefits including:

  • Pre-tax income is deducted from your paycheck, lowering your total taxable income.
  • Your HSA balance grows tax-free.
  • The IRS won't tax money you withdraw to pay for medical expenses.2

How Do I Qualify for an HSA?

To open an HSA, you must have a high deductible health plan (HDHP). Due to the high out-of-pocket costs and lower monthly premiums, these plans are typically utilized by young, relatively healthy people. In addition, you can not:

  • Be claimed as a dependent on the previous year’s tax return.
  • Have Medicare.
  • Have any other health coverage, aside from certain exceptions as outlined by the IRS.2

HSA Pros

HSAs include numerous tax benefits. At the end of the year, you can roll any remaining amount over into the next year and continue accumulating until retirement. HSAs cover many medical procedures and are sometimes accessible via debit cards.

HSA Cons

In order to qualify for an HSA, you must have an HDHP (high deductible health plan). This doesn't work for everyone, particularly those with high healthcare costs.

What Is a Health Reimbursement Account?

Whereas individuals or employees can fund their own HSAs, only an employer can fund an HRA. When employers offer HRAs, most people benefit from taking advantage of them. With an HSA, you can withdraw funds to pay for approved services and procedures. If you have an HRA, you have to pay the expenses upfront and your employer reimburses you for the cost.

Your employer determines how much to contribute on an annual basis, and it’s important to remember that you can't add your own money to the account.

HRA Pros

Employers fund HRAs, meaning it doesn’t cost you anything to participate. Like HSAs, these plans have expansive coverage for numerous procedures, and there aren't any prerequisites on what health insurance you can use it with. 

HRA Cons

Unlike HSAs, you are not able to contribute to your own HRA account. Also, your employer sets the contribution amount and eligibility rules. If you lose your job, you can't transfer the funds in your HRA account, nor can you roll the amount over at the end of the year.

HSA vs. HRA

Your financial advisor can help you determine your eligibility for a non-employer HSA. However, HRAs are only available under a current employer that offers this benefit. Both employees and employers can fund HSAs, and it might help self-employed workers with HDHPs save on taxes. 

You can only withdraw funded amounts in an HSA, but you can withdraw funds from an HRA, even if it's not funded yet. The funds in your HSA stay with you even if you change jobs. Additionally, they roll over year after year. After age 65, you may use HSA funds for non-medical reasons, but these non-medical withdrawals may be taxed. With an HSA, you do have the option to make an early withdrawal, but you may be subject to a penalty. HRAs, on the other hand, do not allow for early withdrawals or for non-medical withdrawals.

Talk to your financial advisor regarding your options as an employee, self-employed worker or individual. Weigh the pros and cons and determine whether you can save money on your yearly medical expenses by enrolling in either of these plan types.

Your Next Step

Retiree health insurance costs (whether it be private insurance prior to Medicare or Medicare-related costs) are often an overlooked expense when people plan for their retirement.  If you're ready to get serious about your retirement planning and better understand what costs you may need to prepare for, important deadlines and how you plan to pay the costs, we are here to help.  We focus on working with people to help them transition into retirement and age in retirement.  Click on the link below to schedule your first phone meeting.

Click here to schedule a your first phone meeting   


  1. https://www.healthsystemtracker.org/chart-collection/health-expenditures-vary-across-population/#item-while-health-spending-increases-throughout-adulthood-for-both-men-and-women-spending-varies-by-age_2016
  2. https://www.irs.gov/publications/p969

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.