Updated on January 2, 2025
How to Successfully Manage a Health Savings Account
Health Savings Accounts (HSAs) allow you to set aside money on a pre-tax basis for qualified medical, dental and vision expenses (such as copayments, deductibles and coinsurance).
Employees enrolled in an HSA through their place of work will often be provided an annual employer contribution as well. Because HSAs have cash-saving and long-term investment options, they can be viewed as tax-efficient vehicles for both emergency savings and retirement planning. Below are answers to some frequently asked questions about Health Savings Accounts.
How does an HSA benefit my long-term financial goals?
- HSAs are triple tax-advantaged assets:
• Contributions are made with pre-tax dollars
• Earnings on the contributions grow tax-free
• Withdrawals for qualified expenses are made tax-free
- As an HSA grows, you accumulate a separate tax-advantaged asset to fund health care and other expenses during your retirement. (See the section below titled “What happens when I make a withdrawal from my HSA” for the tax treatment of withdrawals.)
How do I qualify to enroll in an HSA?
- To open an HSA, the IRS requires you to have a qualified High Deductible Health Plan, as well as meet other requirements. Give careful consideration to whether your current budget accommodates the higher deductibles. If your employer does not offer an HSA plan, you can still open one through an outside provider. We recommend that you consult your financial planner and/or tax advisor.
How do I access my HSA funds?
- Accessing your funds is simple. Once you sign up for an HSA, you will receive a debit card to pay for qualified medical expenses completely tax-free. You may also save and submit receipts.
How much can I contribute to my HSA each year?
- For tax year 2024, which ends on April 15, 2025, those with individual coverage may contribute up to $4,150/year. If you have family coverage, your limit grows to $8,300/year.
- For tax year 2025, which ends on April 15, 2026, those with individual coverage may contribute up to $4,300/year. If you have family coverage, your limit grows to $8,550/year.
- Those 55 and older are eligible to add an extra $1,000/year catch-up contribution.
What happens when I withdraw from my HSA?
- Withdrawals from your account can be made tax-free as long as they are made for qualified medical expenses. Because they are managed externally, you can carry your unused balance with you for the rest of your life, (unlike many flexible spending accounts which require you to make withdrawals within a calendar year, and can be lost if you leave your employer).
- Withdrawals for non-qualified expenses before age 65 are taxed as regular income and receive an additional 20% tax penalty. After 65, they are taxed as regular income but with no penalty.
- Keep in mind that you can save receipts for qualified medical expenses incurred in one year, and make a withdrawal from an HSA in a later year to cover those expense as long as you were covered by a high deductible health plan when you initially incurred the qualified medical expense.
Are Medicare premiums qualified expenses?
- Traditional Medicare premiums for Part B and Part D are qualified medical expenses. Premiums for the managed care alternative to traditional Medicare, Medicare Advantage, are also qualified medical expenses. However, premiums for Medigap (aka Medicare Supplement) plans that cover the cost sharing for Traditional Medicare are NOT qualified medical expenses.
Are there any age considerations to be aware of?
- It’s never too early to start contributing to an HSA. According to a Fidelity Investments, a 65-year-old couple retiring in 2024 can expect to spend approximately $330,000 to cover health care expenses in retirement.
- If you want to keep contributing to an HSA after age 65, you cannot be enrolled in any part of Medicare (even part A). You will incur a tax penalty if and when you enroll in Medicare without stopping your HSA contributions six or more months before.
Are contributions to my HSA investible?
- Yes! HSAs are the only investment vehicles that allow tax-free contributions, tax-free growth and tax-free withdrawals. For that reason, financial planners recommend them as a robust way to invest and save for medical expenses in retirement. Any amount above the minimum cash requirement in your HSA can be invested into stock and bond funds similar to those available through your 401(k) or IRA. The HSA owner will need to opt in to investing the difference and select how it will be invested. Otherwise, the full balance will remain in cash, which reduces the benefit of compounding over time.
These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.
