Laura explains how an HSA helps you reduce taxes, build wealth, and cut the cost of just about any healthcare expense, even if your insurer doesn't cover it.
Laura explains how an HSA helps you reduce taxes, build wealth, and cut the cost of just about any healthcare expense, even if your insurer doesn't cover it.
Transcript: https://money-girl.simplecast.com/episodes/tips-to-maximize-an-hsa-from-tax-savings-to-retirement/transcript
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If you're like me, you likely have some gripes about the high cost of healthcare and health insurance, not to mention how exceptionally difficult navigating the system can be. One thing I can't complain about is a medical savings account designed to reduce the cost of healthcare: a health savings account, or HSA.
This post will review who's eligible to contribute to an HSA, how it helps you significantly reduce taxes, build wealth, and cut the cost of just about any healthcare expense you pay out of pocket, even if your insurer doesn't cover it. You'll learn how to maximize an HSA's money-saving benefits now and in the future.
Welcome back to episode 948 of Money Girl–I appreciate you spending time with me! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter. Subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Or leave a voice message with your question or comment by calling 302-364-0308. I'd love to feature your question on Finance Friday, our weekly Q&A, bonus edition of the show!
What is a health savings account (HSA)?
An HSA is a tax-advantaged medical savings account that allows you to pay a wide range of qualified healthcare expenses, like medical, dental, vision, and hearing care costs, entirely tax-free. However, you must have an HSA-qualified health plan with a high deductible to qualify for an HSA. I'll explain more about these health plans in a moment.
The unique benefit of an HSA is that not only can you spend it (including any investment earnings) on qualified healthcare expenses, but it turns into something that acts more like an individual retirement account (IRA) after age 65, and I'll cover the specifics.
READ ALSO: 4 common HSA mistakes and how to correct them
What are the tax benefits of a health savings account (HSA)?
I love HSAs because they pack a big tax punch, giving you three powerful tax benefits.
The beauty of an HSA is that contributions are tax-deductible even if you don't itemize deductions on your return. The funds can earn interest, or you can invest some or all of them using a menu of options, such as mutual or exchange-traded funds, depending on your provider.
Your original contributions and earnings are tax-free when you withdraw them for a wide range of IRS-approved healthcare expenses, whether your insurer covers them or not. I'll give you some examples of eligible healthcare costs that may surprise you.
Depending on your income tax rate, using an HSA to pay qualified expenses tax-free could mean getting a 20% to 30% discount on those costs. Throughout your lifetime, that can add up to significant savings!
Until you turn 65, you can only use HSA funds for qualified, unreimbursed healthcare expenses, or you must pay income taxes plus a hefty 20% penalty. For instance, using an HSA for a vacation or groceries means you must pay income tax plus an additional 20% penalty on withdrawn amounts.
Additional benefits of using a health savings account (HSA)
In addition to its triple tax benefits, using an HSA comes with the following advantages:
No other account offers all these benefits and tax advantages.
Who qualifies for an HSA?
I mentioned that you need an HSA-qualified health plan to be eligible to contribute to an HSA. They typically charge lower premiums because they come with higher deductibles and are known as high-deductible health plans (HDHPs). Remember that your deductible is the amount you must pay out-of-pocket for covered costs before your insurance benefits begin each year.
You can purchase HSA-qualified health insurance through your employer or independently, such as through Healthcare.gov, a state insurance marketplace, or a private insurance broker.
Some employers offer an HSA with a particular institution; however, you can open an HSA with any institution you like and roll over funds from one to another.
If you open an HSA through work and change jobs or become unemployed, you can continue using the same account or roll over funds to an HSA at a different institution. Even if you lose HSA-eligible insurance, you can continue spending your HSA balance; however, you won't be eligible to make new contributions.
So, if you have an HSA but enroll in a health plan that isn't HSA-qualified, like a spouse's PPO or Medicare, you're no longer eligible to make new HSA contributions. However, as mentioned previously, you can keep an existing HSA balance invested and use it for healthcare expenses for yourself, your spouse, and any dependents.
Similar to a retirement account, you can only own an HSA as an individual. There's no such thing as a joint HSA.
RELATED: Rules for using a health savings account (HSA) as a couple
How much can you contribute to an HSA?
For 2025, you can contribute up to $4,300 to an HSA if you have individual health coverage or $8,550 with a family plan. If you're over 55, you can contribute an additional $1,000 catch-up amount with either type of plan.
For 2026, the HSA contribution limit for individual coverage increases to $4,400, and the family plan cap goes up to $8,750. The $1,000 catch-up contribution remains the same.
Since these are total limits, be mindful of them if someone else contributes to your account. For example, if your employer contributes $1,000 for 2025 and you're under 55 with an individual plan, you can only contribute $3,300.
You can make tax-deductible contributions anytime during the year, even up to April 15 for the previous tax year. But you're never required to contribute to an HSA in any year.
LISTEN ALSO: Can I contribute the family limit to a health savings account?
How can you use an HSA in retirement?
I mentioned that after age 65, you can spend an HSA on non-qualified expenses without paying a 20% penalty. Be advised, though, that you must pay income tax on those withdrawn amounts.
That's a great reason to max out an HSA annually, even if you don't expect many healthcare expenses. However, once you enroll in Medicare, which is typically at 65, you're no longer eligible to make new HSA contributions.
READ ALSO: Your guide to saving money with an HSA now and in retirement
15 qualified HSA expenses
HSA-qualified expenses include a wide range of unreimbursed healthcare costs you incur until you meet your annual deductible or aren't covered by insurance. They must pay for healthcare services, equipment, or medications.
You can see a complete list of HSA-qualified expenses in IRS Publication 502, Medical and Dental Expenses. Here are 15 ways to spend your HSA.
1. Medical care: The cost of a doctor visit, ambulance ride, emergency room care, hospitalization, prescription drugs, birth control, and many other types of medical goods
and services can be paid for with an HSA.
2. Medical equipment: Any equipment you need for daily living, such as a wheelchair, walker, and crutches, is qualified. Even purchasing a wig at the advice of a physician or mental health professional can be covered with an HSA.
3. Dental care: Going to the dentist is covered for routine cleanings, fluoride treatments, X-rays, fillings, extractions, dentures, and braces. Teeth whitening is not a qualified expense, nor is any cost or therapy that's purely cosmetic.
4. Vision care: You can use an HSA for contact lenses and glasses, including prescription sunglasses, and surgery such as LASIK or the removal of cataracts. If your sight or hearing is impaired, you can purchase and care for a guide dog or other service animal.
5. Hearing care: You can use HSA funds to cover the cost of hearing tests and purchase hearing aids and batteries.
6. Chiropractic care: All chiropractic care is HSA-qualified, even if your insurance doesn't cover it. That means you can explore this alternative for pain relief before you get medication or surgery.
7. Acupuncture: Even if your health insurance doesn't cover acupuncture, you can use your HSA to pay for it.
8. Over-the-counter medications: You can buy non-prescription medications, like pain relievers, allergy medications, cold and flu medications, sleep aids, eye drops, and menstrual products with your HSA.
9. Fertility enhancement: You can use an HSA to pay for any treatment to overcome an inability to have children, such as in vitro fertilization. Once you're a parent, you can also spend it on breast pumps and supplies that assist lactation. Or you can use an HSA to go in the opposite direction and pay for sterilization or legal abortion.
10. Drug and alcohol addiction treatment: Any amount you pay for yourself or a family member for inpatient treatment at a drug rehabilitation center, including meals and lodging, is HSA-qualified. You can also pay for transportation to and from Alcoholics Anonymous meetings in your community, assuming a medical provider has deemed them necessary for you.
11. Care from a psychologist or psychiatrist: You can use HSA funds for the costs to support yourself or a family member whom you claim as a dependent through the treatment of a mental illness. You can use HSA funds to pay for a patient's treatment at a healthcare institution if a physician prescribes it to alleviate a physical or mental disability or illness.
12. Home improvements: Any special equipment or improvements installed in a home to care for yourself or your dependent family members can be paid for with an HSA if their purpose is medical care. They might include constructing entrance ramps, widening doorways, installing lifts, or lowering cabinets and sinks to make them accessible.
13. Transportation and travel: Getting to and from medical care, such as on a bus, taxi, train, plane, or ambulance, can be paid for with an HSA. It includes regular visits to see an ill family member if visits are recommended as part of the treatment. You can include lodging, but not meals, when you travel to another city for medical purposes.
If you use your vehicle to get to medical services, you can use HSA money to cover certain out-of-pocket costs, including gas, oil, tolls, and parking fees. But you can't cover general vehicle maintenance or insurance costs.
14. Long-term care: You can pay long-term care costs like being in an assisted living facility, receiving in-home nursing care, and premiums for long-term care insurance.
15. Certain insurance premiums: While you typically can't pay health insurance premiums with an HSA, the following are exceptions:
How do you open and fund an HSA?
If you qualify for an HSA, they're available at many local institutions or online platforms, like Lively. They function like a checking account, accepting paper checks, debit cards, and online banking transactions.
The unique tax advantages and flexibility of an HSA make it an excellent way to cut the rising cost of healthcare for you and your family. Alternatively, you can consider it more like a medical savings account for the future, leaving your contributions invested and growing to spend in retirement.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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