Financial Education Series
Health Savings Accounts
The Triple Tax-Advantaged Healthcare & Retirement Tool
Health Savings Accounts (HSAs) offer a unique combination of tax benefits not found in any other financial account. Beyond helping with current medical expenses, HSAs can be a powerful tool for long-term financial planning and retirement preparation, providing substantial tax advantages along the way.
Why This Matters
Healthcare costs are among the largest expenses in retirement, with estimates suggesting couples may need $300,000 or more just for medical expenses. HSAs provide unparalleled tax efficiency for funding these costs, allowing you to set aside pre-tax dollars, grow investments tax-free, and withdraw funds tax-free for qualified medical expenses.
HSA Basics
What Is an HSA?
Definition
A tax-advantaged savings account specifically designed for medical expenses. Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year to year and remain yours even if you change employers or health insurance plans.
Eligibility Requirements
To open and contribute to an HSA, you must:
High-Deductible Health Plan (HDHP)
For 2024, an HDHP is defined as having:
Note: These limits are adjusted annually for inflation.
Triple Tax Advantage
1. Tax-Deductible Contributions
Contributions to your HSA are tax-deductible, reducing your taxable income for the year. If contributed through payroll deduction, they're also exempt from FICA taxes (7.65%).
2. Tax-Free Growth
Interest, dividends, and capital gains within your HSA accumulate tax-free. Unlike 401(k)s or traditional IRAs, there are no required minimum distributions (RMDs).
3. Tax-Free Withdrawals
Distributions used for qualified medical expenses are completely tax-free. After age 65, you can also withdraw funds for non-medical purposes by paying only ordinary income tax (no penalty).
Comparison: 401(k)s and traditional IRAs offer tax-deductible contributions and tax-deferred growth, but withdrawals are taxed. Roth IRAs provide tax-free withdrawals and growth, but contributions are made with after-tax dollars. Only HSAs offer all three tax advantages.
Contribution and Usage Rules
Key Guidelines
Contribution Limits
For 2024, the annual HSA contribution limits are:
Note: These limits apply to total contributions from all sources (you, your employer, and others).
Qualified Medical Expenses
You can withdraw tax-free for a wide range of healthcare expenses, including:
See IRS Publication 502 for a complete list of qualified medical expenses.
Penalties and Non-Qualified Withdrawals
Using HSA funds for non-medical expenses has these consequences:
The 20% penalty is waived in case of death, disability, or when you reach age 65.
HSA Investment Strategies
Maximizing Long-Term Growth
The Investment Approach
Rather than using HSA funds for current healthcare expenses, consider paying those costs out-of-pocket while investing your HSA balance for long-term growth. This strategy maximizes the potential of the triple tax advantage.
Investment Options
Many HSA providers offer investment options similar to 401(k)s, including:
Cash Reserve Strategy
Consider keeping a portion of your HSA in cash for near-term medical expenses while investing the rest for long-term growth. This balances liquidity needs with growth potential.
The HSA as a Retirement Tool
Retirement Planning Potential
An HSA can function as a supplemental retirement account, offering more flexibility than a 401(k) or IRA for healthcare expenses while providing similar tax benefits for non-medical withdrawals after age 65.
Reimbursement Strategy
Save medical receipts for expenses you pay out-of-pocket. You can reimburse yourself from your HSA at any point in the future — even years later — allowing your HSA investments to grow tax-free in the meantime.
Contribution Priority
For many investors, an optimal contribution strategy might be:
Tips for Choosing an HSA Provider
Selection Criteria
Key Features to Evaluate:
Account Access Options:
This content is educational in nature and updated as of 2024. HSA rules, contribution limits, and tax treatments may change. The information provided is not tax, legal, or accounting advice. Please consult with a qualified professional regarding your specific situation.