Some of you may have saved in a Health Savings Account either through work or on your own. These are like IRAs that can be used for medical costs tax-free in retirement. So, let’s talk about them now that many of you are eligible to withdraw that money.
An HSA is a tax-exempt trust that is set up with a qualified HSA trustee. You can contribute to an HSA if you are enrolled in a high-deductible health insurance plan. (If you are enrolled in Medicare, you cannot make contributions.) The money in the HSA grows tax-free until you need it in retirement. As long as the money is used for qualified health expenses, you won’t have to pay income tax on the earnings.
When you make a contribution to an HSA, you get a deduction on your tax return. If you contribute through an employer plan, you put away dollars that will never be taxed. These plans are portable if you leave that employer. Self- employed individuals can contribute after-tax dollars to HSA plans. You do not need to have earned income to contribute.
You can use HSAs currently for medical expenses, but I’m going to focus more on using the money in retirement. You may want to use the plan your employer set up. But if you have the freedom to choose your own, you should know you have options. You can “roll over” these plans to other providers. Costs have decreased in recent years and you should look for good investment choices. Morningstar does a ranking each year that may be helpful. Go to www.morningstar.com and search for HSA Providers.
There are annual limitations on how much can be contributed. For 2025, a single person can contribute $4,300. If you are over age 55, you can make an additional catch-up contribution of $1,000. If you have family high-deductible coverage, you can contribute up to $8,550. Contributions can be made up until the tax filing deadline. You report contributions to the IRS on Form 8889 that is filed with your return.
You can use this money for unreimbursed medical expenses like deductibles, co-insurance, prescriptions, dental costs, glasses, COBRA premiums, Medicare premiums (but not Medigap premiums). But a lot of people don’t remember that this account is there and what to use it for!
The money can be used for you and your spouse. If your kids are still dependent, you can use it for them too.
When you’re under age 65 and take the money out for ineligible expenses, you’ll pay a 20% penalty plus tax. So don’t do that. Once over age 65, or if your spouse died or is disabled, no more penalties.
If you are delaying Social Security payments until age 70, you might want to tap your HSA for qualified medical costs in the preceding years. That will cut down on drawing from other investible assets. It might also open up possibilities to do larger Roth IRA conversions (if that makes sense in your situation).
If you die with an HSA, your spouse can use it for their qualified medical expenses. If your beneficiary is someone other than your spouse, the money becomes taxable to your heirs. So be sure to think about using up this account before you die if your beneficiary is not your spouse.
One more consideration: If you use the money in your HSA to cover medical costs currently, you can no longer claim those costs as medical deductions on Schedule A for your tax return. If you have larger medical deductions in retirement, it may be more valuable to not use the HSA dollars so you preserve your deduction.
You can track your deductible medical expenses throughout the year and then talk to your CPA to see if you will be over the standard deduction ($15,000 for singles in 2025, $30,000 married filing joint). If you don’t want to use the tax deduction, you can always reimburse yourself for any costs (even all the way back to when you opened the HSA!).
HSAs are known for being triple tax-exempt: first, when you put the money in the account, second, as the assets grow tax-free in your HSA, and third, when you withdraw the money tax-free to pay for qualified health costs in retirement.
