HSA and its Triple Tax Advantage
Health Insurance Plans are confusing and costly! Unless you have a magical plan with no deductible, no copay, a low premium, and wide coverage, it is easy to feel like your health insurance plan is taking more than it gives back. Thankfully, if you have a high-deductible health plan (HDHP), you may be eligible to open a health savings account (HSA), which can be used as a triple tax-free benefit for you and your family.
An HSA is a great way to set aside money for current and future medical bills. Unlike a Flexible Spending Account (FSA), the HSA is not a “use it or lose it” scenario, allowing you to grow your savings account year over year. Imagine your HSA as your own savings account for medical expenses that come up.
Eligibility for an HSA
Not everyone is eligible for an HSA, but if you fit the criteria below, it is easy to start an account, make contributions, and receive tax benefits immediately:
- You’re enrolled in an HDHP: In 2024, this means your health insurance plan has a minimum deductible of $1,600 for single coverage or $3,200 for family coverage. In 2025, the minimum deductible increases to $1,650 for single coverage or $3,300 for family coverage.
- You aren’t enrolled in Medicare
- You’re 18 years or older and no one can claim you as a dependent on their tax return
Triple Tax-Free Benefits of an HSA
Tax-Free Contributions
Whether contributing through pretax payroll deductions from your employer or through after-tax personal contributions, funds contributed to your HSA account are not taxed, similar to a traditional 401(k) or IRA. This means that every dollar you contribute to your HSA up to the contribution limit (see below) is a tax-free dollar back to you.
Tax-Free Growth
Much like an IRA, the earnings of an HSA are tax-deferred, and any earnings on the account are tax-free. Some HSA accounts let you invest in mutual funds, ETFs, or even individual stocks. There is no expiration date or required minimum distributions on HSA accounts, meaning that account holders can let their savings grow for years, all tax-free.
Tax-Free Withdrawal
As long as your contributions are withdrawn for qualified medical expenses, you won’t be taxed on the related distributions ever. An added benefit of the HSA is that anyone 65 years and older can use their HSA funds for any reason and will not be subject to the 20% tax penalty. However, if the HSA funds are spent on non-qualified medical expenses, the related distribution will be taxed.
Maximizing Your HSA
Each year you will see the benefits of having an HSA account, but let that account grow, so you can use your HSA to your advantage later in life. With an HSA, you are not required to take a distribution to reimburse yourself for medical expenses paid out of pocket within the same year. This means, if you’re able to do so, pay for your qualified medical expenses out of pocket and keep all your qualified medical expenses receipts in a safe place. Then, in later years, hopefully during your retirement, you will be able to reimburse yourself for those old qualified medical expenses from your earlier years, all tax-free.
2024 and 2025 Health Savings Account Contribution Limits
Be aware there are maximum annual HSA contribution limits. For 2024, individuals can fund up to $4,150 a year, families are eligible up to $8,300, and people aged 55 and older can contribute an annual “catch-up contribution” of $1,000. For 2025, individuals can fund up to $4,300 a year, families are eligible up to $8,550, and people aged 55 and older can contribute an annual “catch-up contribution” of $1,000. Don’t exceed these limits, as any amount in excess of these limits is subject to a 6% tax rate. You also cannot use your HSA to reimburse yourself for medical expenses incurred before you established the account.
| Health Savings Account Contribution Limits | 2024 | 2025 |
|---|---|---|
| Self-Only | $4,150 | $4,300 |
| Family | $8,300 | $8,550 |
| Catch Up (Age 55+) | $1,000 | $1,000 |
Have Questions?
Navigating the complexities of HSAs and maximizing their benefits can be challenging. Our experienced CPAs at Jones & Roth CPAs and Business Advisors are here to help!
Contact us today to schedule a consultation and take control of your financial future.
