With the triple tax benefits of the Health Savings Account (HSA), it is no surprise that HSAs are growing in popularity as a key retirement strategy. According to a May 2024 report by the Consumer Financial Protection Bureau, “The prevalence of HSAs among consumers has surged in recent years, with approximately 36 million HSAs reported in 2023. These accounts collectively hold over $116 billion in assets, representing an increase of more than 500 percent since 2013.” Contributions to an HSA are deductible from the current year’s taxable income, can be invested to grow tax-free, and feature tax-free qualified withdrawals resulting in a triple tax advantage.
An HSA acts like a savings account, where participants can periodically set aside their own money for future healthcare needs. According to the Fidelity Investments August 2024 Retiree Health Care Cost Estimate, “A 65-year-old retiring today could spend $165,000 on health care in retirement.”
HSA accounts can only be established in conjunction with a qualified High Deductible Health Plan (HDHP) and one cannot be enrolled in any other non-HSA qualified health insurance plan, including Medicare or Medicaid. For 2025, the HDHP minimum deductible to qualify for participation in an HSA is $1,650 for individuals and $3,300 for families. The actual deductible will vary depending on the actual health plan purchased. In addition, to qualify for an HSA in 2025, the HDHP must have a limit on out-of-pocket medical expenses, including deductibles and copayments but excluding premiums, of $8,300 for individuals or $16,600 for families.
With a qualified HDHP, one becomes eligible to open an HSA account with an approved trustee, like Charles Schwab or HSA Bank. In 2025, the tax-deductible contributions to an HSA are limited to $4,300 for individuals and $8,550 for families. If you reach age 55 by the end of the year, you may contribute an additional $1,000 in 2025. Contributions can be made from various sources including the individual, the employer, and even other family members. Regardless of the source, contributions from all sources cannot exceed these limits. There is no income limit to be eligible to contribute to an HSA.
What is most exciting is the triple-tax-free status of the HSA. Contributions made to the HSA are tax-deductible in the year of contribution. Any capital appreciation and income generated from investments within the HSA are tax-free, and withdrawals for qualified medical expenses are also free of tax. In contrast, retirement savings vehicles such as IRAs and 401(k)s offer tax-deductible contributions and tax-free growth, but the withdrawals are taxed as ordinary income. Roth IRAs offer tax-free growth and qualified tax-free withdrawals, but the contributions are not deductible. In California, 529 Plans offer tax-free growth and tax-free withdrawals for qualified education expenses, but contributions are not deductible. Yes, the HSA is the only triple-tax-free vehicle around.
HSA owners can use available funds to meet annual healthcare costs or save and invest these funds for the long term. In theory, the HSA has the potential to become a self-funded long-term care policy. We realize that these plans are not for everyone, especially those already faced with high annual healthcare costs. However, for those who are able to cover annual medical costs while allowing HSA balances to grow, the HSA offers a wonderful investment opportunity.
Sources: consumerfinance.gov. hsabank.com, irs.gov, cnbc.com, Fidelity.com
