How I’m Talking to Clients About Maximizing Their HSA

I’m always excited to educate clients about how Health Savings Accounts (HSAs) are powerful savings vehicles with unique “triple-tax-free” benefits. Our role includes helping clients maximize their contributions, account growth, and distribution plan with their HSA, and utilizing the account to save taxes and create long-term security.

Key Takeaways

• Maximize contributions each year. The tax benefits make these savings vehicles ultra attractive.
• Let the funds accumulate, consider a plan to cash flow current medical expenses, and let the HSA funds grow long-term.
• Think about the HSA as part of a larger comprehensive retirement plan. As a long-term vehicle, this account can play a significant role in the retirement healthcare picture.

What I’m Telling My Clients

In 2024, the contribution limits for a Health Savings Account are $4,150 for individuals and $8,300 for families. You are eligible to contribute to an HSA account if you participate in a High Deductible Healthcare Plan (HDHP). 

The contribution limits include both employee and employer contributions. If your employer is also contributing to your HSA, reduce your contribution so that the total contribution does not exceed the $4,150 or $8,300 allowed in 2024. Those age 55 and older may contribute an additional $1,000 catch-up contribution.

Important

The HSA limits are expected to increase to $4,300 for individuals and $8,550 for families in 2025.

Optimizing Your Contributions

You can contribute to your HSA through payroll deductions or directly from your bank account. However, you forfeit an additional tax advantage if you choose the latter. Payroll contributions are deducted before federal income tax, state income tax, and FICA taxes (Social Security and Medicare). On the other hand, direct bank account contributions only reduce federal and state income taxes, missing out on the 7.65% savings from FICA taxes.

Accumulating Your Funds

Unlike a Flexible Spending Account (FSA), an HSA can accumulate over years or decades, rolling over annually and growing. To drive the long-term savings element home, I often refer to HSAs as “health care IRAs.” An HSA provider typically requires you to keep a minimum amount in cash—usually $1,000 to $2,000—and allows you to invest the remaining balance. Those investments are often low-cost mutual funds that grow without taxation on the interest, dividends, or capital gains as long as the funds are withdrawn for qualified medical expenses.

There is no time limit for reimbursing yourself from an HSA for qualified medical expenses as long as the costs were incurred after establishing the HSA and utilizing a high-deductible healthcare plan. Save your receipts indefinitely so you can take future tax-free withdrawals.

Withdrawing Your HSA Funds

HSA funds can be used for various healthcare costs for you, your spouse, and your dependents. Some common qualified expenses include medical, dental, vision, mental health services, prescriptions, over-the-counter items, and certain healthcare premiums. As a retirement savings vehicle, you can utilize your HSA plan to pay for Medicare premiums, COBRA, Long-Term Care Insurance, and health coverage while receiving unemployment benefits. 

Note

A 65-year-old retiring this year can expect to spend an average of $165,000 in health care and medical expenses throughout retirement.

HSA funds withdrawn for non-qualified expenses before age 65 are subject to income tax and a 20% penalty. After age 65, you may withdraw non-medical expenses without a penalty but must pay ordinary income taxes on the distributions.

The Bottom Line

An HSA is a powerful tool for long-term savings. By maximizing contributions, you can grow your funds tax-free for future healthcare costs, making it an essential part of your retirement strategy. With flexible withdrawals and the ability to reimburse past expenses, an HSA is key to securing your financial future.