The Ultimate Guide to Health Savings Accounts

Everything you need to know.

If you’re looking for a way to save on healthcare costs while also benefiting from a powerful tax strategy, a Health Savings Account (HSA) is one of the best tools available. Not only does it offer triple tax benefits, but it also provides flexibility, long-term savings opportunities, and the peace of mind that your funds are always there when you need them. Whether you’re aiming to reduce your taxable income, save for future healthcare expenses, or even invest in your health, an HSA can play a key role in your financial and healthcare strategy.

In this comprehensive guide, we’ll dive into the mechanics of HSAs, including how they work, who can contribute, contribution limits, and what the money can be used for. We’ll also cover some lesser-known perks, like portability, employer contributions, and how the funds can be used for purchases made in previous years—something that sets HSAs apart from other types of accounts.

Additionally, we’ll explain how to set up an HSA, whether your employer will handle it for you, and whether you and your spouse can both contribute to the same account if you have different health plans.

A Health Savings Account is a tax-advantaged savings account that is designed to help individuals save for medical expenses. What makes it especially attractive and sets these accounts apart from regular savings accounts is the triple tax advantage: tax-free contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP). These plans come with higher deductibles and lower monthly premiums compared to traditional health insurance plans, and they offer you the opportunity to save on premiums while still having a safety net for medical expenses. The funds you contribute to an HSA can help offset those higher out-of-pocket costs and allow you to save for future healthcare needs.

High-Deductible Health Plans- An Overview

To contribute to an HSA, you must be enrolled in an HDHP. These plans typically come with higher deductibles, which means you will pay more out-of-pocket before your insurance begins to cover medical costs. The trade-off, however, is that HDHPs usually have lower monthly premiums, making them an attractive choice for people who are healthy, rarely need medical care, and want to save on their monthly insurance costs.

Here’s a quick look at what qualifies as an HDHP:

  • Individual Coverage: A plan with a deductible of at least $1,600 in 2025.
  • Family Coverage: A plan with a deductible of at least $3,200 in 2025.
  • Out-of-Pocket Maximums: For 2025, the out-of-pocket maximum for an HDHP is $8,050 for individual coverage and $16,100 for family coverage.

Another key component of HDHP is that the plan cannot offer coverage before you have met your deductible.  For example, some health plans allow enrolled individuals to have a low flat co-pay to see their primary doctor regardless of if the annual deductible has been met.  With a HDHP, you must first meet your deductible before the plan can cover anything.

These higher deductibles and lower premiums make HDHPs a great choice for those who are looking to save on monthly healthcare expenses, particularly if you are generally healthy and don’t expect to use your insurance frequently.

The Triple Tax Benefits of an HSA

One of the key reasons HSAs are so appealing is the triple tax advantage. This means you benefit from tax breaks in three important ways:

  1. Tax Deduction on Contributions: Contributions to your HSA are tax-deductible, meaning that the money you contribute reduces your taxable income for the year. For example, if you contribute $3,000 to your HSA, your taxable income is reduced by that amount, which could save you money on your taxes.
  2. Tax-Free Growth: Any interest, dividends, or capital gains your HSA balance earns grow tax-free. Whether you choose to leave the funds in a simple savings account or invest them in mutual funds, stocks, or bonds, you won’t have to pay taxes on the earnings.
  3. Tax-Free Withdrawals for Qualified Medical Expenses: When you use your HSA funds to pay for qualified medical expenses, you do not owe taxes on the withdrawal. Eligible expenses can include doctor visits, prescription medications, vision and dental care, hospital stays, and more. As long as the money is spent on healthcare-related costs, you won’t pay any taxes.

Example of Triple Tax Benefit: Let’s say you contribute $3,000 to your HSA in a given year. Not only does that lower your taxable income by $3,000 (which could reduce your tax liability), but the $3,000 grows tax-free in the account. Then, if you need to withdraw the funds to pay for medical expenses, you do so without paying any taxes.

Contribution Limits: How Much Can You Contribute to an HSA?

The IRS sets annual contribution limits for HSAs, which can change each year. For 2025, the contribution limits are as follows:

  • For Individual Coverage: You can contribute up to $4,850 annually.
  • For Family Coverage: You can contribute up to $9,800 annually.

Catch-Up Contributions: If you’re 55 or older, you can contribute an additional $1,000 in “catch-up” contributions each year. This allows you to maximize your HSA balance as you approach retirement.

Who Can Contribute to an HSA?

It isn’t just you that can add money into tour HSA account.  Other people or even business entities can contribute to your HSA, adding to its versatility.  A contribution from any of these sources will count towards the total contribution limit.

  • You, the Account Holder: You can contribute up to the annual limit, and those contributions are tax-deductible.
  • Your Employer: Many employers offer contributions to employees’ HSAs as part of their benefits packages. These contributions are typically tax-free, and many employers match a portion of what employees contribute, making it easier to maximize your savings.
  • Family and Friends: While family members or friends can also contribute to your HSA, they are subject to the same contribution limits as you, and their contributions aren’t tax-deductible. However, their contributions still help boost your HSA balance.

Spending HSA Funds

How Can You Use the Money?

The IRS has a list of what is called Qualified Medical Expenses; HSA funds can be used for any of these.  Keep in mind that this list can and does change, but below are some of the more common uses for HSA funds.  The latest and most up-to-date list can be found here.

  • Doctor visits, hospital stays, and surgeries
  • Prescription medications
  • Dental care, including cleanings, fillings, and braces
  • Vision care, including glasses, contacts, and eye exams
  • Mental health services, including therapy and counseling
  • Chiropractic services and acupuncture
  • Medical equipment, such as blood pressure monitors or crutches

The funds can also be used for medical expenses for your spouse and dependents, even if they aren’t covered under your insurance plan.

One of the most significant advantages of an HSA is the flexibility of delayed reimbursement. You can pay for qualified medical expenses out of pocket and choose to reimburse yourself later from your HSA, as long as the expenses were incurred after the account was opened. As long as you keep the receipts and have documentation to prove the expenses were qualified, you can submit the information to the IRS and use the funds for reimbursement at any point in the future.

When Can't You Use HSA Funds?

 

You generally cannot use Health Savings Account (HSA) funds for anything that isn’t considered a qualified medical expense under IRS guidelines. Here are some common situations where HSA funds cannot be used:

  1. Non-Medical Personal Expenses: HSA funds are strictly for medical expenses. Using them for things like gym memberships, general wellness programs, or cosmetic procedures (like Botox or face-lifts) is not allowed, unless they’re medically necessary (like reconstructive surgery after an accident).

  2. Insurance Premiums: You can’t use HSA funds to pay for general health insurance premiums, unless you’re receiving unemployment benefits or paying for long-term care insurance, COBRA coverage, or Medicare (once you’re 65).

  3. Over-the-Counter (OTC) Medications (Without Prescription): Before the CARES Act in 2020, OTC medications were not eligible for reimbursement unless you had a prescription. However, the CARES Act made OTC meds eligible again, but only for certain items (like pain relievers or cold medications) — so it’s always good to double-check if the item is covered.

  4. Cosmetic Surgery & Procedures: Unless the procedure is medically necessary (for example, reconstructive surgery after an accident or illness), cosmetic treatments aren’t covered.

  5. Non-Medical Expenses After 65 (or if you are not disabled): Once you hit age 65, you can still withdraw funds for non-medical expenses without facing a penalty. However, you will be taxed at your ordinary income tax rate on those non-medical withdrawals, similar to how 401(k) or IRA withdrawals are taxed.

  6. Expenses Outside of the U.S.: If you use HSA funds for medical expenses abroad, you might face restrictions. While it’s allowed in some cases, the expenses must still qualify as eligible under IRS guidelines, and you may need additional documentation.

  7. Non-Qualified Dependents: If you’re using your HSA for someone who isn’t a tax-dependent or your spouse, the expense won’t qualify.

It’s always a good idea to double-check receipts and consult IRS Publication 502 (Found Here) or an HSA administrator to ensure you’re using funds appropriately. If you mistakenly use the HSA for ineligible expenses, you could face taxes and a 20% penalty.

Never Expire: Use HSA Funds for Past Expenses

One of the most unique features of an HSA is that the money in the account never expires. Unlike a Flexible Spending Account (FSA), which requires you to use the funds by the end of the year (or risk losing them), your HSA balance rolls over year after year. You can save the funds in the account for as long as you need them, and there’s no deadline for when you must use the money.

Even more interesting is that you can use your HSA funds to reimburse yourself for qualified medical expenses that you incurred in previous years, as long as you have the proper documentation. For example, if you had a medical procedure in 2020 but didn’t have enough money to cover the costs at the time, you can reimburse yourself from your HSA at any point in the future—just keep the receipts and submit them with your taxes for that year. This gives you the flexibility to use your HSA funds to cover medical expenses retroactively, making it a great tool for long-term healthcare planning.

Portability: Taking Your HSA With You

Another significant advantage of an HSA is its portability. Unlike other types of health accounts, like a Flexible Spending Account (FSA), which is tied to your employer or health insurance plan, an HSA is an individual account. This means that the funds in your HSA remain with you even if you change jobs or health plans. You won’t lose your balance if you switch employers or move to a different health insurance plan.

The portability of HSAs makes them especially attractive to those who frequently change jobs or plan to retire early. Your HSA is a savings vehicle that travels with you, and the funds remain yours regardless of your employment status.

Why Employers Like to Contribute to HSAs

Employers are often keen to offer HSA contributions as part of their benefits package. By contributing to an employee’s HSA, employers can help employees offset the higher deductibles of HDHPs without significantly raising the company’s healthcare expenses. Many employers will match employee contributions up to a certain limit, which can help boost employees’ savings without requiring a significant out-of-pocket investment on their part.

Additionally, employer contributions to an HSA are tax-free, meaning neither the employer nor the employee pays taxes on these contributions. For employers, it’s an efficient way to support employees’ healthcare needs while maintaining a tax advantage for both the company and the employee.

HSAs as Retirement Savings Vehicles

Many people don’t realize that HSAs are not just for current medical expenses—they can also be used as an effective retirement savings tool. Once you turn 65, you can use your HSA funds for any purpose without facing the 20% penalty (though you will still owe income taxes on withdrawals not used for medical expenses). This flexibility means that your HSA can serve as a secondary retirement account, helping you save for both healthcare and non-healthcare expenses in retirement.

How to Set Up an HSA Account

Setting up an HSA is relatively simple, and it can be done through your employer or on your own. Here’s what you need to know:

  • Through Your Employer: If your employer offers an HDHP as part of your benefits package, they may also set up an HSA for you. In this case, your employer will typically work with an HSA administrator or bank to open the account. If this is the case, you’ll likely be able to contribute directly through payroll deductions, which makes it easy to manage your contributions. Your employer may also make contributions on your behalf, and these contributions will be tax-free.
  • Opening an HSA on Your Own: If your employer doesn’t offer an HSA or if you prefer to set one up independently, you can open an HSA through a bank, credit union, or other financial institution that offers them. Many large financial institutions, including health insurance providers, offer HSA options. You’ll need to provide proof of enrollment in an HDHP to qualify, and once the account is set up, you can make contributions directly into the account via electronic transfer, check, or even payroll deductions if your employer allows it.
  • Can You and Your Spouse Contribute to the Same HSA?: If you and your spouse have different health plans, you cannot contribute to the same HSA. However, if you both qualify for an HSA (meaning each of you is enrolled in an HDHP), each of you will need to open your own HSA. You can each contribute up to the individual contribution limit ($4,850 in 2025 for individual coverage). If one or both of you have family coverage, you can each contribute up to the family limit of $9,800.

If both you and your spouse are enrolled in a family HDHP, you can contribute up to the family limit between both accounts—just ensure that the total contributions between both of you don’t exceed the annual contribution limit for family coverage.

HSA Beneficiaries

An important and often over-looked aspect of HSA accounts is the account beneficiary.  In the event that the account owner were to die, where should that money go?  This is something that you can establish through the financial institution that holds your account.  Below is what happens to the account depending on how you have structured the account to pass on after your death.

  1. Spouse is the Beneficiary: If the spouse is named as the beneficiary, the HSA will be transferred to the spouse’s name, and they can continue using it as their own HSA. The account will be treated as if it was their own, allowing them to make contributions (if eligible) and use the funds for qualified medical expenses.
  1. Non-Spouse Beneficiary (e.g., child, friend, or charity): If a non-spouse beneficiary inherits the HSA, the account is treated as a taxable account. The beneficiary will have to pay income tax on the value of the HSA at the time of the account holder’s death. However, the funds can still be used for medical expenses, but any distributions for non-medical expenses will be taxed and subject to penalties, just like any other non-qualified withdrawal from an HSA.
  1. No Beneficiary Designation (or if the estate is the beneficiary): If the HSA owner didn’t designate a beneficiary, or if the estate is the beneficiary, the account will go through the deceased’s estate. The funds in the HSA will be included in the decedent’s taxable estate, and the value will be subject to income tax. The estate may have to distribute the funds to heirs, and depending on the jurisdiction, there could be additional estate tax considerations.

Key Points:

  • Spouse can inherit and continue using the HSA without penalty.
  • Non-spouse beneficiaries face taxes on the account’s value, but they can still use the funds for medical expenses.
  • If there is no beneficiary, the estate will inherit the HSA, and the funds will be taxed.

Takeaways

Health Savings Accounts are an incredibly valuable tool for anyone with a high-deductible health plan. Not only do they provide triple tax benefits, but they also offer portability, the ability to use funds for medical expenses incurred in past years, and long-term savings potential. Whether you use the funds for immediate medical expenses, as a retirement savings vehicle, or as a way to save on taxes, an HSA can play a key role in helping you manage your healthcare costs and secure your financial future.

If you’re eligible for an HSA, consider making the most of it by contributing as much as possible each year and keeping track of your receipts for any medical expenses you can reimburse yourself for in the future. Your HSA can help you save money, grow your wealth, and be prepared for whatever healthcare expenses come your way!

Aaron

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