The Health Savings Account (HSA) may be the most underrated financial savings vehicle out there.
Why, you ask?
HSAs offer a rare triple tax benefit.
- Contributions are tax-deductible (or pre-tax if made through payroll).
- Growth is tax-free as long as funds remain in the account.
- Withdrawals are tax-free when used for qualified medical expenses.
This makes HSAs more tax-efficient than even a 401(k) or Roth IRA, which either offers a tax break when you contribute or when you take money out, but not both. The tax advantages alone can make your money go significantly further, especially over time.
There are no restrictions on when you can take money out of an HSA.
- Withdrawals can be made at any age, unlike many retirement accounts that have an early withdrawal penalty before age 59.5.
- Withdrawals do not have to be taken the same year your medical expenses occur. This provides significant flexibility on the timing of withdrawals.
Let’s discuss how you can use these rules to your advantage.
Step 1: Determine if you’re eligible to use an HSA.
- You can only use an HSA if you have a specific type of health insurance called a high-deductible health plan (HDHP) which also offers an HSA.
- You can use either an HSA or a flexible spending account (FSA), but not both.* Contributions to both accounts are tax deductible and can be used to reimburse yourself for medical expenses. Unused FSA contributions are forfeited at the end of the year; whereas, unused contributions to an HSA can be kept in your account and invested for growth.
- Currently, you can have, but not contribute to an HSA once you are within 6 months of enrollment of Medicare Part A. This rule may be eliminated with new tax legislation, but for now, be careful about how much you contribute as you near age 65.
Step 2: Maximize your contributions.
- For 2025, the IRS limits for HSA contributions are $4,300 for individuals, $8,550 for families and an additional $1,000 catch-up contribution for each person on the plan who is over age 55.
- Contribution limits include employer contributions, so, if you and your spouse have a family plan and your employer contributes $1,000 on your behalf, you can contribute another $7,550.
- SECRET: CONTRIBUTE FROM PAYROLL
- You can make HSA contributions directly from your bank account or you can have your employer make contributions directly through payroll. Both options will help you avoid federal and state tax on the contributions, but only contributions made through payroll will avoid Social Security and Medicare tax as well. That’s an additional savings of 7.65% tax for you as an employee.
- SECRET: THE SUPER HSA
- Children can remain on a parent’s health insurance until age 26. If your child is on your family plan but is no longer a dependent, he or she can make an HSA contribution to their own account the same year you do. You can contribute the full $8,550 to your HSA and your child can contribute another $8,550 to their own HSA. The child’s contribution is reported as a deduction on their own tax return, but you can give them the money to make the contribution. Most kids are considered dependent through age 18, or through age 23 if they are full-time students.
Step 3: Manage your withdrawals.
- Avoiding withdrawals during your working life is a key technique to maximizing the value of your HSA. While you can take money out to cover your or your dependents’ care along the way, doing so undermines one of the biggest benefits of the HSA: tax-free growth. If you contribute the maximum family contribution for 20 years, that’s a total of $171,000 in contributions. If you leave that money alone and it earns a 7% return, you would have over $350,000, which can all come out tax free if used for medical expenses.
- SECRET: RECORDKEEP TO TIME YOUR WITHDRAWALS
- Let’s say you leave your contributions invested for 20 years per the above example. Now, you are retired and need money from your investments to provide for your living expenses. Wouldn’t it be nice if you could take a tax-free withdrawal from your HSA to spend on whatever you want? That’s exactly what you can do if you have kept good records of unreimbursed medical expenses over the years.
- Because HSAs allow you to reimburse yourself in a different year than a medical expense was incurred, you can take HSA withdrawals in retirement for medical expenses you paid years earlier. The key is being able to prove that withdrawals from your HSA do, in fact, relate to previous medical expenses in the event of an IRS audit. To do that, you need records of the HSA-eligible expenses paid.
- The list of HSA-eligible expenses is lengthy and includes many overlooked items like sunscreen, contact solution, feminine hygiene products, ear plugs, first aid kits, reproductive care, long-term care premiums, COBRA premiums, etc. Take a look at this list to make sure you’re tracking as many of your qualified expenses as possible.
- Snapping receipts, keeping a spreadsheet, and organizing expenses by year can all help keep your organized, but realistically, this does require some work. In exchange, you can time your tax-free withdrawals at the optimal time, which could help you minimize income taxes and Medicare premiums in retirement.
An HSA is more than just a medical account, it’s a unique combination of tax savings, investment potential, and future healthcare funding. Whether you’re looking to save money on this year’s taxes or invest for long-term care costs, with smart contributions, disciplined investment, and proper recordkeeping, you can turn this underappreciated account into one of your most valuable financial tools.
*You can use both an HSA and an FSA in the same year if your FSA is limited purpose and only reimburses you for dental and vision expenses.
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