Think of an HSA as a "medical savings account" with three powerful tax benefits. It's one of the best financial tools available for saving money on healthcare costs, both now and in retirement.
The Triple Tax Advantage
HSAs offer something no other savings account can match - tax benefits at every stage:
- Tax-deductible contributions: Money you put in reduces your taxable income
- Tax-free growth: Any interest or investment gains are never taxed
- Tax-free withdrawals: Pay no taxes when using funds for qualified medical expenses
No other account - not a 401(k), IRA, or Roth IRA - offers this triple tax advantage. That's why financial experts often recommend maxing out HSA contributions before other retirement accounts.
HSA Contribution Limits (2025)
- Individual coverage: $4,300
- Family coverage: $8,550
- Catch-up contribution (age 55+): Additional $1,000
These limits include all contributions - from you, your employer, and anyone else. Limits typically increase each year to keep pace with inflation.
HSA Eligibility Requirements
To open and contribute to an HSA, you must:
- Be enrolled in a High-Deductible Health Plan (HDHP)
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else's tax return
- Not have other disqualifying health coverage (like a regular FSA or HRA)
What Makes a Plan an HDHP?
For 2025, a High-Deductible Health Plan must have:
- Minimum deductible: $1,650 (individual) or $3,300 (family)
- Maximum out-of-pocket: $8,300 (individual) or $16,600 (family)
Alex earns $75,000 and contributes $4,300 to his HSA. That contribution reduces his taxable income to $70,700, saving him approximately $1,032 in federal taxes (24% bracket). If he invests the HSA and it grows to $50,000 over 10 years, he pays zero taxes on those gains. When he uses it for medical expenses in retirement, he pays zero taxes on withdrawals. Same $4,300 in a regular account would have cost him over $1,000 in taxes.
What Can HSA Funds Pay For?
HSA money can be used for a wide range of "qualified medical expenses":
Commonly Covered
- Doctor visits and copays
- Prescription medications
- Dental care (cleanings, fillings, braces)
- Vision care (glasses, contacts, LASIK)
- Mental health services
- Physical therapy
- Medical equipment (crutches, blood pressure monitors)
- Over-the-counter medications (since 2020)
- Menstrual products
- Sunscreen
Also Covered (Often Overlooked)
- Acupuncture
- Chiropractic care
- Hearing aids
- Long-term care insurance premiums
- Medicare premiums (after 65)
- COBRA premiums
Keep all your medical receipts! You can pay out of pocket now, save the receipts, and reimburse yourself from your HSA years later. This lets your HSA money grow tax-free longer while maintaining your flexibility.
HSA vs. FSA: What's the Difference?
People often confuse HSAs with FSAs (Flexible Spending Accounts). Here's how they differ:
- Rollover: HSA money rolls over forever; FSA has "use it or lose it" rules
- Ownership: You own your HSA; FSAs are tied to your employer
- Plan requirement: HSAs require an HDHP; FSAs work with any plan
- Contribution limits: HSAs allow higher contributions ($4,300) than FSAs ($3,300)
- Investment: HSA funds can be invested; FSA funds cannot
HSA Investment Strategies
Once your HSA balance reaches a certain threshold (often $1,000-$2,000), you can invest the excess in mutual funds, stocks, or bonds - just like a 401(k). This makes HSAs powerful retirement savings tools.
Short-term Approach
Keep funds in cash if you plan to use them for current medical expenses. This ensures money is available when needed.
Long-term Approach
If you can pay current medical expenses out of pocket, invest your HSA for growth. At age 65, you can withdraw for any purpose (paying regular income tax, but no penalty). For medical expenses, withdrawals remain tax-free at any age.
Want to Pair an HDHP with an HSA?
Our licensed agents can help you find HSA-eligible health plans and explain how to maximize your tax savings.
Get Free GuidanceFrequently Asked Questions
Can I use my HSA if I'm no longer on an HDHP?
Yes! You can always use existing HSA funds for qualified medical expenses, even if you switch to a non-HDHP. You just can't make new contributions unless you have HDHP coverage.
What happens if I use HSA money for non-medical expenses?
Before age 65, you'll pay income taxes plus a 20% penalty on non-qualified withdrawals. After 65, you pay only income taxes (no penalty) - similar to a traditional IRA. For qualified medical expenses, withdrawals are always tax-free.
Can I use my HSA for my family's medical expenses?
Yes, you can use HSA funds for qualified medical expenses of your spouse and dependents, even if they're not covered by your HDHP.
What happens to my HSA when I turn 65?
You can no longer contribute to an HSA once enrolled in Medicare. However, you can continue using existing funds tax-free for medical expenses, including Medicare premiums (but not Medigap premiums).