Most people know that health savings accounts (HSAs) can help them pay for qualified health-care expenses with pre-tax dollars. However, many people aren’t aware that HSAs offer unique benefits and potential tax advantages that can help them boost their retirement savings.
HSAs were first introduced in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act. They were designed to encourage individuals to take more responsibility for their health-care expenses and to shop around for the best prices. Since HSAs were introduced, the annual contribution limits have increased, and the list of qualified medical expenses has expanded to include telemedicine and over-the-counter medications.
HSA rules to know
Before we explore the great benefits of a health savings account, here are some rules and exceptions to be aware of:
- Typically, HSAs are available to people who are enrolled in high-deductible health insurance plans, which are plans with deductibles of at least $3,000 for a family. The minimum deductible that qualifies you to use an HSA is $1,400 for individual coverage or $2,800 for family coverage. Many plans require you to contribute even more before your coverage kicks in. If meeting the high deductible would be a hardship for you, you will probably be better off choosing a lower-deductible policy and forgoing an HSA. Consult with your financial advisor to figure out what strategy is best for you.
- Except under certain circumstances, health insurance premiums are not HSA-eligible expenses.
- You can’t contribute an unlimited amount of money to an HSA; there are annual maximum contribution limits. For 2024, you can contribute up to $4,150 for self-coverage or $8,300 if you are providing coverage for your family. For 2025, people with an eligible individual high-deductible health plan can contribute up to $4,300 to an HSA, while family contributions are capped at $8,550. Individuals who are age 55 and older can contribute an additional $1,000.
- Once you qualify for Medicare at age 65, you are no longer eligible to contribute to an HSA. However, if you have funds in your HSA account at that point, you can still use them to reimburse health care expenses.
- You cannot be enrolled in any other health-care plan that is not a high-deductible health-care plan, except for certain vision and dental plans and certain types of preventive care.
- You cannot use an HSA if you can be claimed as a dependent on someone else’s tax return.
Now let’s look at three significant benefits of HSA accounts for those who qualify for them.
Benefit #1: An HSA offers triple tax benefits
A health savings account is the only long-term savings account that offers these three tax benefits: You can claim a tax deduction for contributions you put into it; money in the account grows tax-free; and withdrawals you take from it are also tax-free.
In comparison, withdrawals you make from other tax-advantaged accounts, such as 401(k)s, are typically taxed as income. Also, if withdrawals on those other types of accounts are tax-free, as they can be from Roth IRAs, you don’t get a tax break when you put the money into the account.
Benefit #2: You don’t have to “use it or lose it”
If you have a flexible spending account (FSA), you know that you have to use any money you’ve set aside in that account by a certain date each year. You have to “use it or lose it.” (An FSA is a workplace account you can use to pay for certain out-of-pocket medical costs. You contribute to the account as a payroll deduction from your salary, and the IRS does not tax that portion of your salary.)
However, there is no “use it or lose it” provision with HSAs; you can roll over any unspent balances in your HSA from year to year.
Benefit #3: You can invest your HSA contributions
Because you can invest your HSA contributions, you can use the account to grow your money. Even if you have to spend some of the money along the way, the tax-free growth can add up.
Most people who use HSAs fail to take advantage of this investment opportunity. According to a study released in March 2024 by the Employee Benefit Research Institute (EBRI), only 13 percent of HSA account holders invested in assets other than cash in 2022.
Investing your HSA funds in a diversified portfolio enables you to take advantage of compounding growth over time. Work with your financial advisor to figure out your potential future medical needs, risk tolerance and appropriate contribution amounts when choosing how to invest your HSA savings.
Health-related expenses represent the largest portion of many retirees’ budgets. When you use an HSA as a retirement savings tool, you can set aside money for health-care costs. Work with your advisor to find a balance between your current and future medical expenses.
Please contact us so we can explore how a health savings account can supercharge your retirement savings strategy.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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