HSA vs HYSA: Which Should You Use?

What Is an HSA?

A Health Savings Account (HSA) is a tax-advantaged account specifically for medical expenses. It's like a 401(k) for healthcare—but with even better tax benefits.

The "triple tax advantage":

1. Tax-deductible contributions — Reduces your taxable income
2. Tax-free growth — Interest and investment gains aren't taxed
3. Tax-free withdrawals — When used for qualified medical expenses

No other account in the U.S. tax code offers all three benefits. Not 401(k)s, not IRAs, not Roth accounts. HSAs are uniquely powerful.

The Catch: You Need an HDHP

To contribute to an HSA, you must have a High-Deductible Health Plan (HDHP). For 2025, that means:

• Minimum deductible: $1,650 (individual) / $3,300 (family)
• Maximum out-of-pocket: $8,300 (individual) / $16,600 (family)

If your health insurance doesn't meet these requirements, you can't contribute to an HSA.

What Is a HYSA?

A High-Yield Savings Account (HYSA) is a regular savings account that pays above-average interest rates—typically 3.5-4.5% APY compared to the 0.01% national average.

HYSAs have:

• No restrictions on how you use the money
• No eligibility requirements — anyone can open one
• No contribution limits
• FDIC insurance up to $250,000

The downside: interest is taxable as ordinary income. A 4% APY might effectively be 2.5-3% after taxes, depending on your bracket.

Side-by-Side Comparison

When to Use an HSA

Use your HSA for:

• Expected medical expenses — Doctor visits, prescriptions, dental, vision
• Long-term healthcare savings — Let it grow tax-free for decades
• Retirement healthcare costs — Average couple needs $300K+ for healthcare in retirement

Pro strategy: Don't spend your HSA now. Pay current medical expenses out of pocket, let your HSA grow tax-free for decades, then withdraw in retirement for tax-free income.

When to Use a HYSA

Use your HYSA for:

• Emergency fund — 3-6 months of expenses, instantly accessible
• Short-term savings goals — Car, vacation, home down payment
• Cash buffer — Money you might need within 1-2 years
• Non-medical expenses — Anything an HSA can't cover

The Optimal Strategy: Use Both

If you're eligible for an HSA, here's the ideal approach:

HSA Account Options

Not all HSA providers are created equal. Look for:

• Low or no fees — Monthly fees eat into tax savings
• Investment options — For long-term growth
• Competitive cash rates — If you keep a cash balance

Top HSA providers:

• Fidelity HSA — No fees, excellent investment options, no minimum to invest
• Lively — No fees, integrates with TD Ameritrade for investing
• HealthEquity — Widespread employer partnerships, solid platform

Common Mistakes to Avoid

Mistake 1: Treating HSA Like a Checking Account

Spending HSA funds as you go wastes the tax advantage. Let it grow tax-free for decades—the power is in long-term compounding.

Mistake 2: Not Investing HSA Funds

Leaving HSA money in cash earning 0.01% misses the point. Once you have enough to cover your deductible in cash, invest the rest in low-cost index funds.

Mistake 3: Not Having Both Accounts

HSAs have use restrictions. You still need a HYSA for:

• True emergency fund (job loss, car repair)
• Non-medical short-term savings
• Cash you need flexible access to

Mistake 4: Confusing HSA with FSA

FSAs (Flexible Spending Accounts) are "use it or lose it"—funds expire at year end. HSAs roll over forever. Don't confuse them.

The Math: Why HSAs Win for Medical Expenses

Let's compare saving $4,300/year for medical expenses in each account over 20 years:

The HSA advantage: $58,000 more for medical expenses over 20 years. That's the power of tax-free growth plus tax-free withdrawals.

The Bottom Line

If you're eligible for an HSA: Max it out. It's the most tax-advantaged account available. Use it for long-term healthcare savings, not as a spending account.

You still need a HYSA: For emergency fund, short-term savings, and anything non-medical. HSAs are restricted; HYSAs are flexible.

The winning strategy: Max HSA first → Build 3-6 month emergency fund in HYSA → Use HYSA for everything else.