A wellness checkup for your health care expenses.
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A health savings account (HSA) is a tax-advantaged account that helps you save for health care costs. Once your balance reaches the minimum required by your HSA provider, you may be able to invest the money, much like a 401(k) plan or other retirement account.
Key Points
- HSA contributions can reduce your taxable income, and qualified withdrawals are tax-free.
- After age 65, an HSA can function much like a backup retirement account.
- Unused HSA funds roll over from year to year and can be invested for future growth.
What are the tax benefits of an HSA?
A health savings account offers what many financial professionals call âtriple tax savingsâ because it can lower your tax liability in three ways:
- You contribute with pretax dollars, which reduces your taxable income for the current tax year.
- Your money grows tax-free over time, with no taxes on interest, dividends, or capital gains.
- Any money you withdrawâprovided itâs used for qualified medical expensesâis also tax-free.
As long as you plan your spending so HSA funds are used only for qualified medical expenses, you donât have to worry about paying taxes on that money. Plus, funds in your HSA roll over from year to year, so youâre not required to spend down your account. You can let the money grow throughout your lifetime.
Who is eligible for an HSA?
You must meet certain conditions to start a health savings account:
- You must be enrolled in an HSA-eligible health plan. Plans typically indicate whether they qualify for HSA contributions.
- You have no other health coverage (with a few exceptions).
- You arenât enrolled in Medicare.
- No one claims you as a dependent on their tax return.
As long as you meet these criteria, you can open and contribute to an HSA.
HSA-eligible health plans often have lower monthly premiums than traditional health plans. In exchange, you may face higher deductibles or other out-of-pocket costs before insurance begins covering more of your expenses. The amount you save on your premium could be used to build your HSA balance.
Understanding HSA contribution limits
HSA contribution limits depend on whether you have individual (âself-onlyâ) or family coverage. The Internal Revenue Service (IRS) adjusts these limits annually for inflation.
Annual HSA contribution limits| Tax year | Self-only | Family |
|---|
| 2027 | $4,500 | $9,000 |
| 2026 | $4,400 | $8,750 |
| 2025 | $4,300 | $8,550 |
If youâre age 55 or over and not enrolled in Medicare, you can make an additional $1,000 contribution to your HSA. If you and your spouse are both 55 or older, covered by an HSA-eligible health plan, and not enrolled in Medicare, you can each make a $1,000 catch-up contribution, for a total of $2,000 annually.
You can make HSA contributions for a prior tax year until that yearâs tax-filing deadline, typically April 15. Be sure to indicate whether a contribution is for the current or prior tax year.
How are HSA withdrawals taxed?
In general, as long as you withdraw the money from your HSA and use it for qualified medical expenses, you donât pay taxes on it. There is no requirement to wait a certain period of time before making your first withdrawal (as there is with a tax-advantaged retirement account). Even if youâre no longer eligible to make contributions, you can still withdraw the money tax-free as long as itâs for qualified costs.
If you withdraw funds before age 65 and use them for nonqualified expenses, youâll be subject to a 20% penalty.
Good to know
Itâs possible to use your HSA as a backup retirement account. Once you reach age 65, you can withdraw money from your HSA and use it for nonmedical expenses without the 20% penalty. You pay taxes on the withdrawal, as you would with a traditional individual retirement account (IRA). You can also use the HSA funds to cover health insurance premiums.
How can I use an HSA for long-term savings and retirement?
The triple tax benefit encourages many workers to incorporate an HSA into their long-term financial and retirement planning. Some potential strategies include:
- Use only what you need immediately. Consider using HSA funds only for out-of-pocket health care costs that are immediate and necessary. The rest of your contributions can be invested, benefiting from compounding returns over time.
- Save for future medical expenses. You can use your HSA to save up for future procedures and medical emergencies. In some cases, out-of-pocket costs can still be devastating. An HSA can serve as a health care emergency fund to help cover those costs without breaking your budget.
- HSA as a health care account in retirement. By investing the bulk of your contributions, itâs possible to build a long-term portfolio that can be used in retirement. The HSA can then cover costs (including Medicare premiums) related to health care. Other retirement accounts, such as IRAs and 401(k)s, can be used for everyday expenses.
- Reimburse all your health care costs at once. Itâs possible to reimburse yourself later for past out-of-pocket qualified expenses. Some individuals use after-tax dollars today to pay medical costs, then save their receipts (digitally or physically) over time. Later, during retirement, they reimburse themselves from the HSA for all those costs at once, providing a chunk of tax-free capital during retirement.
- Backup IRA. Finally, itâs possible to use an HSA as another tax-advantaged retirement account. If you wait until youâre 65 to access invested funds, you can treat unqualified expenses as if theyâre distributions from an IRA. Youâll need to pay federal (and typically state) taxes, but you wonât get zinged by that 20% tax penalty.
The bottom line
A health savings account is one way to invest for your future with tax-advantaged funds. Itâs also one of the very few available ways to completely avoid taxes on a portion of your moneyâprovided you withdraw funds only for qualified expenses.
If you want to invest part of your HSA, youâll need to set up an account with a custodian and make sure that money is kept separate from the rest of your portfolio. But once you have a system in place, you can use an HSA to get the most out of your health care spending, with triple tax savings to help power your investment strategy.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by Nancy Ashburn
