Understanding Health Savings Accounts and High Yield Savings Accounts

Health Savings Accounts (HSAs) and High Yield Savings Accounts (HYSAs) can both be valuable for managing medical expenses, but they function quite differently.

One provides tax advantages and potential for long-term growth, whereas the other offers more immediate access to funds. So, if you’re wondering which might suit your healthcare costs, here’s a breakdown.

An HSA is specifically designed for saving money for medical expenses, covering areas like dental and vision care.

As of 2024, more than 39 million people in the US were utilizing HSAs. Some of the standout features and benefits of HSAs include:

• Excellent tax benefits: Contributions to HSAs can lower your income tax bill. Unlike certain retirement accounts, there’s no tax on the interest accrued or on withdrawals for qualified medical expenses. This makes HSAs particularly advantageous for supplementing long-term retirement savings.

• Interest accumulation: HSAs might earn around 2.5% annually, but you could see higher returns—potentially much higher—by shifting to a financial institution that invests in ETFs or mutual funds.

• No expiration date: Unlike flexible spending accounts (FSAs), all unused HSA funds roll over each year without any expiration.

• No balance cap: While there’s an annual contribution limit, there’s no cap on the total amount that can be carried over. By 2024, the typical HSA balance for individuals aged 54 and over was about $6,564.

• Family coverage: HSA funds can cover qualifying medical expenses for yourself, your spouse, and dependents.

• Reduced skips in care: Users of HSAs are generally less likely to avoid preventive care or other essential health services.

To qualify for an HSA, you need to have a high-deductible health plan (HDHP). This kind of insurance usually features low monthly premiums but carries higher out-of-pocket costs. From January 2026, both copper and catastrophic market plans will be included, and those using direct primary care (DPC) will qualify as well.

A high-yield savings account (HYSA) offers a higher interest rate than a typical savings account. Right now, the national average APY for savings accounts hovers at just 0.39%, while HYSAs can provide rates of 4% or more.

While HYSAs have advantageous interest rates, they operate like any other traditional savings account. You can earmark funds for medical expenses, but unlike HSAs, they lack the same tax benefits. You might even owe taxes on the interest you earn.

In summary, HSAs and HYSAs both serve to save for medical expenses but in different ways. HYSAs focus on high interest, while HSAs allow you to earn interest and benefit from tax savings.

To illustrate, say your effective income tax rate is 12%. If you contribute the maximum annual amount to your HSA ($4,300 for individuals), you could see your tax bill for 2025 drop by $516 (which is 12% of $4,300).

If you contribute $4,300 annually for five years, attracting a modest interest rate of 2%, you’d potentially save around $2,580 in taxes and earn up to $1,300 in interest, though this can vary based on withdrawal frequency.

By contrast, investing $4,300 a year in an HYSA at a 4% APY could net an additional $2,679 over five years. After accounting for taxes, the actual gain would likely be closer to $2,374.

If you have a qualified healthcare plan, an HSA makes for a strong option when saving for medical expenses. For those who can leave funds in their HSA long-term, they also serve as a useful method for bolstering retirement savings while paying for healthcare costs during retirement.

According to the Brookings Institute, HSAs are particularly beneficial for individuals in higher tax brackets, as they can reap substantial tax credits through HSA contributions and have the option to keep money in their accounts longer.

On the other hand, HYSAs are better suited for more immediate or medium-term savings goals, allowing for flexibility in how and when the funds are utilized.

Whether building an emergency fund, saving for a home down payment, contributing to a wedding budget, or aiming for another purpose, HYSAs can yield competitive interest rates while granting easy access to your money.

Moreover, if you don’t qualify for an HSA, a HYSA is still an excellent option to save for medical costs.