Do I Need to Contribute to My HSA?

A Health Savings Account (HSA) offers a tax-advantaged way to save and pay for qualified medical expenses. This account serves as a savings vehicle specifically designed for healthcare costs.

HSA Eligibility and Contribution Limits

To be eligible for an HSA, an individual must be covered under a high-deductible health plan (HDHP). For 2025, an HDHP is defined as a health plan with an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The plan’s annual out-of-pocket expenses, including deductibles and copayments but not premiums, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Beyond HDHP enrollment, other eligibility requirements apply. An individual cannot be enrolled in Medicare, nor can they be claimed as a dependent on someone else’s tax return. Additionally, having other health coverage that is not an HDHP may disqualify an individual from contributing to an HSA, with limited exceptions.

The Internal Revenue Service (IRS) sets annual contribution limits for HSAs. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300. Those with family HDHP coverage can contribute up to $8,550. These limits include any contributions made by an employer.

Individuals aged 55 and older are permitted to make an additional catch-up contribution of $1,000 annually. If both spouses are 55 or older and not enrolled in Medicare, each spouse can make this additional contribution to their own separate HSA. Contributions for a given tax year can be made up until the tax filing deadline for that year.

Tax Treatment of HSA Funds

Health Savings Accounts offer distinct tax advantages. Contributions made to an HSA are excluded from taxable income. If contributions are made through payroll deduction, they are also not subject to Social Security or Medicare taxes.

A significant benefit of HSAs is the tax-free growth of invested funds within the account. Interest or other earnings on the assets held in an HSA are not taxed as they accumulate.

Withdrawals from an HSA are tax-free when used for qualified medical expenses. Qualified medical expenses are broadly defined by the IRS and include items such as deductibles, copayments, prescriptions, vision care, and dental care.

Using HSA funds for non-qualified expenses before age 65 has financial consequences. Such withdrawals are subject to income tax and an additional 20% penalty. However, this additional penalty does not apply if the account holder is age 65 or older, or becomes disabled. After age 65, withdrawals for non-medical expenses are taxed as ordinary income, similar to distributions from a traditional Individual Retirement Account (IRA) or 401(k).

Strategic Management of HSA Funds

Effective management of HSA funds involves considering both immediate healthcare needs and long-term financial objectives. One strategic approach is to pay for current medical expenses out-of-pocket and allow the HSA funds to grow untouched for future use. Funds can be withdrawn tax-free at any point in the future for qualified medical expenses incurred today, provided proper records are kept.

HSAs often provide investment options, allowing account holders to invest their funds in various vehicles like stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Many HSA providers offer a selection of investment choices, sometimes including managed options for those who prefer less direct involvement. Investing HSA funds can significantly enhance their long-term growth, especially if the account is maintained over many years.

A notable feature of HSAs is their portability; the account is owned by the individual, not the employer or health plan. This means the HSA remains with the individual even if they change jobs, switch health insurance plans, or enter retirement. Although contributions cease upon enrollment in Medicare, existing funds can continue to be used tax-free for qualified medical expenses.

Maintaining thorough documentation of all qualified medical expenses is important, particularly if funds are not immediately withdrawn for reimbursement. This practice ensures that tax-free withdrawals can be justified to the IRS at any time in the future. The ability to save receipts and reimburse oneself years later provides substantial flexibility.

The HSA can serve as a valuable retirement savings vehicle, complementing other accounts like 401(k)s and IRAs. After age 65, HSA withdrawals for non-medical purposes are treated similarly to traditional IRA withdrawals, subject to ordinary income tax but without the additional 20% penalty. This flexibility makes the HSA a versatile tool for retirement planning, allowing funds to cover healthcare costs or supplement general retirement income as needed.