How Much Should You Keep in Your HSA?

A Health Savings Account (HSA) is a specialized savings and investment vehicle for healthcare expenses. This account helps individuals covered by high-deductible health plans (HDHPs) manage medical costs. An HSA offers tax benefits, allowing for financial growth to address health-related expenditures. It is a valuable tool for current healthcare needs and future financial security.

Understanding Contribution Limits

Eligibility for contributing to an HSA requires enrollment in a High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of $1,650 for individual coverage and $3,300 for family coverage. The out-of-pocket maximums for these plans in 2025 cannot exceed $8,450 for individual coverage and $16,900 for family coverage.

The Internal Revenue Service (IRS) sets annual limits on HSA contributions. For 2025, an individual with self-only HDHP coverage can contribute up to $4,300. For those with family HDHP coverage, the limit increases to $8,550. These limits apply to all contributions, whether from the individual, an employer, or other sources. Individuals aged 55 and older can make an additional “catch-up” contribution of $1,000 beyond the standard annual limit.

Determining Your Contribution Strategy

Deciding how much to contribute to your HSA involves balancing immediate healthcare needs with long-term financial objectives. A foundational approach is to contribute at least enough to cover your health plan’s annual deductible and out-of-pocket maximum. This ensures funds are available for unexpected medical costs, providing a financial safety net. Considering predictable future expenses, such as planned procedures, ongoing medication costs, or routine dental and vision care, can also guide your contribution amount.

An HSA can function as a supplemental emergency fund for medical emergencies. Setting aside additional funds beyond anticipated routine costs provides a buffer for unforeseen health events. This strategy requires careful consideration alongside other financial priorities.

Balancing HSA contributions with other savings vehicles, such as 401(k)s or IRAs, is an important part of a comprehensive financial plan. While maximizing HSA contributions offers significant tax benefits, it should not come at the expense of adequately funding other retirement accounts or addressing high-interest debt.

The “triple tax advantage” of an HSA provides a reason to maximize contributions when feasible. Contributions are tax-deductible, or made with pre-tax dollars if through payroll deductions, reducing your taxable income. Funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Utilizing Your HSA Funds

Properly using your HSA funds involves understanding what qualifies as an “eligible medical expense” according to IRS guidelines. These expenses encompass a wide range of services and products, including doctor visits, prescription medications, dental care, and vision care. Certain over-the-counter medications and supplies may also qualify if prescribed or for specific medical conditions. For a comprehensive list, refer to IRS Publication 502.

Maintaining records of all medical expenses is important. Even if you pay for a medical service or product out-of-pocket, keeping the receipt allows for future tax-free reimbursement from your HSA.

Funds can be accessed through various methods, commonly via a debit card provided by the HSA administrator. You can also pay for services directly out-of-pocket and then reimburse yourself from your HSA at a later date.

Withdrawals from an HSA not used for qualified medical expenses carry specific tax implications. If you are under age 65, such withdrawals are subject to your ordinary income tax rate and may incur an additional 20% penalty. After age 65, non-qualified withdrawals are still subject to income tax but are exempt from the 20% penalty.

Long-Term Management of Your HSA Balance

Managing your HSA balance for the long term involves leveraging its investment opportunities. Many HSA providers allow account holders to invest funds in options like mutual funds, exchange-traded funds (ETFs), or individual stocks, once a certain cash threshold is met. This investment feature allows the account to grow tax-free over decades.

The HSA can serve as a supplemental retirement savings vehicle, particularly for healthcare costs in later life. After age 65, HSA withdrawals for any purpose are free of the 20% penalty, though they remain subject to income tax if not used for qualified medical expenses. This flexibility allows the HSA to function much like a traditional IRA or 401(k) in retirement, but with the added benefit of tax-free withdrawals for medical costs.

A common strategy for long-term growth is to pay for current medical expenses out-of-pocket, allowing the HSA funds to remain invested and grow untouched. This approach, often called the “never touch it” strategy, permits the account to compound tax-free for many years. You can then reimburse yourself for those accumulated past medical expenses in retirement, or simply use the funds directly for future medical costs.

HSAs are fully portable, meaning the account belongs to the individual, regardless of changes in employment or health insurance plans. This portability ensures that accumulated funds and their tax advantages remain with you throughout your career and into retirement.