Why a Health Savings Account Deserves a Place in Your Financial Plan This Enrollment Season
As annual open enrollment season approaches, it is an ideal time to review your health coverage options and consider the financial advantages of a Health Savings Account (HSA). Among the many tax-favored benefits available to individuals, the HSA remains one of the most flexible and powerful tools in the tax code. It can be used by nearly every taxpayer, provided that one important requirement is met.
What Is an HSA and Who Qualifies
A Health Savings Account must be paired with a qualifying High Deductible Health Plan (HDHP). The Internal Revenue Service defines these plans each year. For 2025, the limits are published in IRS Revenue Procedure 2024-25:
Minimum deductible: $1,650 for self-only coverage and $3,300 for family coverage
Maximum out-of-pocket limit: $8,300 for self-only coverage and $16,600 for family coverage
To contribute to an HSA, a taxpayer must be covered under a qualifying HDHP and must not have other disqualifying health coverage, such as Medicare or a general purpose flexible spending account. Additional details appear in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
The Triple Tax Advantage
A Health Savings Account provides three distinct tax benefits that few other accounts can match:
Contributions are deductible for tax purposes or made before tax through payroll if available.
Earnings and investment growth are tax free while the funds remain in the account.
Withdrawals are tax free when used for qualified medical expenses.
If the funds are not used during the year, the balance carries forward indefinitely and continues to grow. There is no “use-it-or-lose-it” rule as there is with a flexible spending account. See Publication 969 for a detailed explanation of these rules.
Contribution Limits for 2025
For the 2025 tax year, the limits published in IRS Revenue Procedure 2024-25 are as follows:
Individual coverage: Up to $4,300
Family coverage: Up to $8,550
Catch-up contribution (for taxpayers age 55 or older): An additional $1,000
Both employees and employers may contribute, but total contributions for the year may not exceed the applicable limit. Employer contributions are excluded from wages for federal income tax purposes, as explained in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Qualified Medical Expenses
Funds may be used tax free for a wide range of medical costs, including:
Doctor and hospital visits
Prescription medications
Over-the-counter drugs and first-aid supplies
Dental and vision care
Certain long-term care services
A detailed list of qualified expenses is provided in IRS Publication 502, Medical and Dental Expenses. Some items, such as gym memberships, nutritional supplements, or cosmetic procedures, are not eligible unless prescribed by a medical professional for a specific condition.
A Hidden Retirement Tool
After age 65, funds in an HSA may be withdrawn for any reason without penalty. If used for non-medical expenses, withdrawals are taxed in the same manner as distributions from a traditional individual retirement account. However, if used for qualified medical expenses, withdrawals remain completely tax free.
This feature allows an HSA to serve as a secondary retirement vehicle. It combines current-year tax savings, tax-free growth, and retirement flexibility unmatched by other account types. See Publication 969, page 7 for details on tax treatment after age 65.
Tax-Efficient Funding Strategy
For many taxpayers, the most tax-efficient order of funding is as follows:
Contribute enough to capture all employer matches, both for the HSA and any workplace retirement plan.
Fully fund the HSA, which provides an immediate deduction and tax-free growth.
Contribute to a Roth Individual Retirement Account or other after-tax savings for long-term diversification.
Although this sequence is not required by law, it is often the most effective strategy for maximizing employer benefits and long-term after-tax wealth.
What if You Are Self-Employed?
A self-employed individual may open and fund an HSA without forming a business entity. As long as the individual is covered by a qualifying high deductible health plan, contributions may be deducted on the personal return using Form 8889 and reported on Schedule 1 of Form 1040.
Once a self-employed taxpayer enrolls in Medicare, no further contributions are permitted. See IRS Instructions for Form 8889 for more information.
A Health Savings Account is one of the few opportunities in the tax code that benefits nearly every taxpayer. It provides immediate tax savings, long-term investment growth, and penalty-free flexibility in retirement. Whether you are an employee evaluating open enrollment choices or a self-employed professional seeking additional deductions, now is the time to determine if an HSA should be part of your financial strategy.
If you would like to understand how an HSA fits into your overall tax and retirement plan, please schedule a consultation with me today.
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