Should I Get an HSA for the Tax Advantages?

A Health Savings Account (HSA) is a personal savings account that allows you to set aside money for healthcare costs with several tax advantages. It is not a health insurance plan, but a financial tool that must be paired with a specific type of high-deductible insurance. The funds can be used for a wide array of medical expenses, and unlike some other health accounts, the balance rolls over each year. This feature means the money is yours to keep and grow, even if you change jobs or retire.

Determining Your Eligibility for an HSA

To open and contribute to a Health Savings Account, you must first be enrolled in a qualified High-Deductible Health Plan (HDHP). An HDHP is a type of health insurance that has a higher deductible than traditional plans. For 2025, the Internal Revenue Service (IRS) requires an HDHP to have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage.

Beyond the deductible, there is a limit on the total amount you are required to pay for in-network care. For 2025, the maximum out-of-pocket expenses for an HDHP, which includes deductibles and copayments, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage. These figures are adjusted annually, so it is important to verify them each year.

Meeting the HDHP requirement is the first step, but other rules apply. You cannot be enrolled in Medicare or be claimed as a dependent on someone else’s tax return for the year. You also generally cannot have any other health coverage that is not an HDHP, such as a spouse’s non-HDHP plan. Exceptions exist for certain permitted coverage, such as for dental, vision, or long-term care.

Eligibility is determined on a monthly basis. This means you must meet all these requirements on the first day of a given month to be eligible to make an HSA contribution for that month.

Understanding HSA Contributions and Tax Implications

One of the primary features of an HSA is its triple-tax advantage. First, contributions are tax-deductible at the federal level, which lowers your taxable income for the year, though some states do not offer this deduction. Contributions can be made through pre-tax payroll deductions or directly to the account, with the latter being deductible when you file your federal tax return.

Second, the funds within your HSA can grow tax-free. Many HSAs offer investment options, allowing you to invest your balance in mutual funds or other securities. Any interest, dividends, or capital gains earned on these investments accumulate without being taxed, which can accelerate the growth of your account.

The third advantage is that withdrawals for qualified medical expenses are completely tax-free. This combination of tax-deductible contributions, tax-free growth, and tax-free withdrawals is unique among savings accounts.

The IRS sets annual limits on how much can be contributed. For 2025, the maximum contribution is $4,300 for an individual with self-only HDHP coverage and $8,550 for an individual with family coverage. These limits include all contributions, whether from you or your employer.

Individuals who are age 55 or older by the end of the tax year can make an additional “catch-up” contribution of $1,000 per year. This provision helps those nearing retirement bolster their savings. If both spouses in a married couple are over 55, each can make a $1,000 catch-up contribution into separate HSA accounts.

Using Your HSA Funds

The money in your Health Savings Account can be used for a wide range of “qualified medical expenses” as defined by the IRS. You can use your HSA funds for yourself, your spouse, and any dependents you claim on your tax return, even if they are not covered by your HDHP. A comprehensive list of expenses can be found in IRS Publication 502.

Common examples of qualified expenses include:

• Payments to doctors, dentists, and chiropractors
• Prescription medications and costs for hospital services
• Vision care, such as eyeglasses and contact lenses
• Dental treatments like fillings and braces
• Over-the-counter drugs and medicines

It is important to understand the consequences of using your HSA for non-qualified expenses. If you are under age 65 and withdraw funds for a purpose other than a qualified medical expense, the withdrawal will be subject to both ordinary income tax and a 20% penalty. For example, if you withdraw $1,000 for a non-medical reason, you would owe income tax on that amount plus a $200 penalty.

The HSA as a Long-Term Savings Tool

A defining characteristic of an HSA is that the funds are not subject to a “use-it-or-lose-it” rule, as the entire balance rolls over from one year to the next. This feature allows the account to serve as a long-term savings vehicle dedicated to healthcare, especially since the funds can be invested for tax-free growth.

The HSA’s role becomes particularly valuable in retirement. After you turn 65, the account offers maximum flexibility. You can continue to make tax-free withdrawals for qualified medical expenses, which can include Medicare premiums (excluding Medigap), dental care, and long-term care services. This provides a dedicated, tax-advantaged source of funds to cover health costs that often arise later in life.

The account also functions as a supplemental retirement account. Once you reach age 65, you can take distributions for any reason without the 20% penalty. While these non-medical withdrawals are subject to ordinary income tax, this treatment is identical to distributions from a traditional 401(k). This makes the HSA a useful tool for planning for both healthcare and general retirement expenses.

Opening and Funding Your Account

Once you have confirmed your eligibility, the process of opening an HSA is straightforward. Many employers that offer an HDHP will partner with a specific HSA provider, which can simplify enrollment. If your employer does not offer one, you can open an account at many banks, credit unions, and investment firms.

The application will require you to certify that you are covered by a qualified HDHP and meet the other eligibility criteria. Researching providers is a good way to compare fees, investment options, and account features.

The most convenient method for funding is through pre-tax payroll deductions if your employer offers this option. With this method, your contributions are automatically deducted from your paycheck before taxes are calculated, providing an immediate tax benefit.

Alternatively, you can make direct, post-tax contributions and then claim a tax deduction when you file your annual tax return. This is a common method for those who are self-employed or whose employers do not facilitate payroll deductions. You have until the federal tax filing deadline, typically April 15th of the following year, to make contributions for the current tax year.