A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. This type of account can act as a vehicle for building up savings and for growing through investing your funds. If used strategically, you could contribute to an HSA for years prior to retirement and then have an account designated to cover medical expenses as you age.
Contribution limits are generally adjusted annually for inflation. In 2025, an individual with self-only coverage can contribute $4,300 (increased from $4,150 in 2024) and a family can contribute $8,550 (increased from $8,300 in 2024). Anyone aged 55 and older is allowed an additional $1,000 contribution.
Here are some things to consider if you’re interested in establishing a Health Savings Account for yourself or your family.
Who is Eligible for an HSA Account?
Anyone who is covered by a High Deductible Heath Plan (HDHP) is eligible to establish a Health Savings Account. A HDHP is any type of insurance plan in which you pay more out-of-pocket before your insurance kicks in and in exchange, you have a lower monthly premium. There is usually no minimum amount that you must deposit or contribute to open an HSA. There are many other types of plans, but the most used option is a Preferred Provider Organization (PPO), which provides health coverage through a network of preferred healthcare providers. Though a PPO is generally more popular, you can’t establish an HSA if you are covered by a PPO.
Other eligibility requirements are as follows:
- You are between the ages of 18-65.
- You are not being claimed as a dependent on someone else’s tax return
- You are not enrolled in Medicare.
The eligibility requirements are one of the primary drawbacks of an HSA because a HDHP is not as popular for health insurance coverage because they can be more expensive year-to-year. However, there are many benefits for those who are willing to pay more now to save more for later.
Tax Benefits of a Health Savings Account
- Your Contributions – If you contribute through a paycheck deduction, the money you put into your HSA is not taxed and reduces your taxable income.
- Additional Contributions – If you have an employer or relative who also contribute to your HSA, that money is not taxed either.
- Qualified Withdrawals – As long as the money is used for qualified healthcare expenses, the money you spend from your HSA is not taxed.
- Deductions – If you stop working, but continue to contribute to your HSA, you can deduct the amount of the contribution on your Federal return.
Your Contributions
Additional Contributions
Qualified Withdrawals
Dedutions
Rules on How to Use Health Savings Account Funds
As noted above, as long as the money in your Health Savings Account is being used for qualified medical expenses, you can use it at any time without having to pay tax on it, but once you turn 65, your use-rules will change to allow you greater flexibility on how you use the funds. 65 is the age that an individual becomes eligible for Medicare, so this is set as the age that the use-rules change.
- Contribution Age Limit – Once you reach the age of 65, you can no longer contribute to your HSA, even if you are still working.
- Non-Qualified Expenses Before 65: If you use the funds in your HSA to pay for a nonmedical expense before you turn 65 years old, you will be charged a hefty 20% penalty on the funds used.
- Non-Qualified Expenses After 65 – After you turn 65, you can use the funds in your HSA to pay for nonmedical expenses. This money IS taxed, but it will not be penalized with the 20% tax penalty.
There are a few other noteworthy items to note on how to use your funds:
- Family – You can use the funds to pay for healthcare costs for your spouse and dependents, even if they are not covered by your healthcare insurance.
- Medicare – After you retire, you can use an HSA to pay for Medicare plans.
- Social Security – You must stop contributing to your HSA six months before you apply to receive Social Security benefits. If you fail to do so, any HSA contributions made within/after the time period of application will be subject to a 6% excise tax penalty.
Grow Your Savings with a Health Savings Account
- No Expiration – An HSA can continue to grow year after year. Flexible Spending Accounts (FSA) must be used annually, but a Health Saving Account can grow throughout your lifetime. Additionally, the account belongs to you, so even if you change employers, you don’t have to close the account, you can keep it.
- Investment Opportunities: You can invest your HSA money in stocks and bonds and the earnings you make from these investments are tax-free. There are some plans that require a minimum balance before you can start investing.
HSA Beneficiary Rules
- Spousal Beneficiary – As long as your spouse is named as the beneficiary of your HSA, if you pass away before the funds are used, your spouse can inherit your HSA tax-free and can use the account as if it was their own.
- Non-Spouse Beneficiary – If you want to leave your HSA to someone other than your spouse, the beneficiary will be required to withdraw all the money and pay income tax on the account’s fair market value.
If you have a HDHP, there are obvious benefits to establishing a Health Savings Account. Our team can help you make the most of this unique savings vehicle and provide options for alternative tax savings opportunities that may work for you – set up a meeting to learn more.
Taylor Clinkenbeard, CPA
Taylor is a Manager in our tax and client accounting services teams. She has developed specific expertise in software, accounting processes, and tax laws to serve our clients.
