HSA (Health Savings Account)

How HSAs work

You qualify for an HSA by being enrolled in a "high-deductible health plan" (HDHP) — a health insurance plan with above-threshold deductibles. The thresholds change annually; for 2025, $1,650+ deductible for individual coverage, $3,300+ for family.

Once you have an HSA, you can:

• Contribute pre-tax dollars up to annual limits (2025: $4,300 individual, $8,550 family, plus $1,000 catch-up for age 55+).
• Invest the balance — most HSA providers offer investment options once balance exceeds a threshold.
• Withdraw tax-free for qualified medical expenses anytime.
• Withdraw for non-medical expenses after age 65 (subject to ordinary income tax, but no penalty).

The contributions can come from payroll deductions (avoiding even payroll taxes) or after-the-fact contributions (deductible on tax return).

Triple tax advantage

The HSA's distinctive feature is its triple tax benefit:

1. Contributions are tax-deductible. Reduces current-year taxable income.
2. Earnings grow tax-free. No tax on dividends, interest, or capital gains within the HSA.
3. Qualified withdrawals are tax-free. No tax on withdrawals for qualified medical expenses.

No other US account combines all three. Roth IRAs have tax-free growth and withdrawals but not deductible contributions. Traditional IRAs and 401(k)s have deductible contributions and tax-free growth but taxed withdrawals.

The investment angle

The HSA's tax advantages make it a powerful long-term investment vehicle:

• Pay current medical expenses out-of-pocket instead of from the HSA.
• Invest the HSA balance in index funds or similar.
• Save medical receipts — qualified expenses don't have to be reimbursed in the year incurred. You can save receipts for decades and reimburse yourself later, tax-free.
• The invested HSA grows like a Roth IRA but with deductible contributions.

For someone who can afford to pay medical bills out-of-pocket and let the HSA invest, the HSA effectively becomes the most tax-advantaged retirement account available.

What counts as qualified medical expenses

The list is broad:

• Doctor visits, hospital stays, surgery
• Prescription medications
• Dental and vision care
• Mental health services
• Long-term care insurance premiums (for older adults)
• Medicare premiums (for those 65+)
• Many medical-related items (glasses, hearing aids, certain over-the-counter drugs)

Notably doesn't include:

• Cosmetic procedures
• Health insurance premiums for those under 65 (mostly)
• Gym memberships and general fitness
• Vitamins and supplements (mostly)

Limits

Annual contribution limits adjusted yearly for inflation. For 2025:

• Individual coverage: $4,300
• Family coverage: $8,550
• Catch-up (age 55+): additional $1,000

Contribute by the tax filing deadline (April 15 of the following year, plus extensions). Excess contributions face 6% penalty.

Drawbacks of HDHPs

To get an HSA, you must be in a high-deductible plan. This means:

• Higher out-of-pocket costs before insurance kicks in.
• Some medical events become unaffordable for households without buffer.
• Worse outcomes for those with chronic conditions or high anticipated medical costs.

HDHPs are most appropriate for healthy individuals with low expected medical use, who can afford the high deductibles in the rare event they're needed. For households with predictable significant medical needs, low-deductible plans (with their HSA-ineligibility) are often the better choice.

Mistakes to avoid

A few common errors:

• Not contributing. HSAs are remarkably underutilized; only a fraction of HDHP enrollees max contributions.
• Spending the balance instead of investing. The HSA's primary value is long-term growth; using it as a year-by-year medical fund forfeits the compounding.
• Losing receipts. Qualified expenses paid out-of-pocket can be reimbursed years later — but only with documentation.
• Switching out of HDHP without strategy. Once you're not in an HDHP, you can't contribute, but existing balance can stay invested and continue to grow.
• Treating it as use-it-or-lose-it. HSAs are NOT use-it-or-lose-it — they roll over indefinitely. (FSAs are use-it-or-lose-it; the two are often confused.)

At age 65

Once you reach 65:

• Withdrawals for non-medical expenses are penalty-free (though still taxed as ordinary income).
• Effectively becomes like a Traditional IRA with the bonus that medical withdrawals remain tax-free.
• Medicare premiums become a qualified expense, providing tax-free withdrawals for insurance costs.

HSA providers

A few major options:

• Fidelity — generally considered best-in-class; no fees, broad investment options, easy to use.
• HealthEquity — large dedicated HSA provider; widely available through employers.
• Lively, Bend Financial — newer providers focused on user experience.
• Employer-provided HSAs — sometimes mandatory routing; quality varies.

If your employer routes HSA contributions to a specific provider, you can usually transfer the balance to a better provider periodically.

Why this matters

The HSA is among the most-overlooked elements of US personal-finance optimization. For someone who:

• Qualifies for an HDHP
• Can afford to pay medical bills out-of-pocket
• Is willing to keep medical receipts long-term
• Has decades to invest

The HSA can produce hundreds of thousands of dollars in tax-free wealth that wouldn't be available through any other account type. The combination of three tax advantages compounded over decades is uniquely powerful.

For someone who can't afford the HDHP deductibles or has high medical needs, the HSA is much less valuable. The product fits a specific situation rather than being universally optimal.