How To Use A Health Savings Account (HSA) As A Powerful Retirement Planning Tool. 2025 Edition
Used smartly, an HSA can be a better deal than a 401k or any kind of IRA. Here's how ..
For Health Savings Accounts (HSAs), the general rules in 2025 are as follows:
You are eligible to contribute to one only if your health insurance plan carries a deductible of at least $1,650 per individual or $3,300 for a family in 2025, and whose out-of-pocket maximum is at most $8,300 / $16,600 (individual / family). If you fall outside either of those two criteria, you are not eligible to contribute to an HSA.
If you do qualify, you can contribute (pre-tax) as much as $4,300 to an HSA in 2025 if you have individual health coverage or $8,550 if you have a family health plan. If you are aged over 55, you can contribute an additional $1,000 per year. You don’t have to pay FICA/FUTA tax on these contributions, unlike with 401k contributions where you do pay these, which saves you 7.65%. Your HSA contributions are deducted from your taxable income for that year.
Like a 401k, but unlike an IRA, there are no income restrictions to these contribution levels. You can make your HSA contributions for a given tax year any time before the April tax deadline for returns associated with that year. For example, your 2025 HSA contributions can be made any time before April Tax Day, 2026.
In addition, your employer may choose to make a part of this contribution on your behalf, which obviously reduces the cost to you.
All funds invested then grow tax-deferred in the HSA account and, if used for qualified expenses (see here for the full list of what is considered qualified, but broadly speaking, we are talking about all general medical expenses, including co-pays, deductibles, prescriptions, procedures etc. not covered by your health plan), are tax-free upon withdrawal.
If funds are withdrawn from your account while you are aged below 65 and/or are spent on non-qualified expenses, then not only are taxes due on the whole of the withdrawal but a 20% penalty is applied. This could mean that to clear $10k out of an early HSA for non-qualified expenses could cost you around $16-$17k of HSA funds, depending on your tax situation.
However, once you reach age 65, the 20% penalty liability for non-qualified use of funds falls away and you can use the funds for any purpose without penalty (although you will pay tax - like in a Traditional IRA - if you don't use the proceeds for qualified expenses or reimbursements for such).
One of the legitimate (qualified) uses of HSA funds is to reimburse yourself for covered medical expenses paid from another source (like from a regular bank account for instance) as long as you have copies of the receipts to prove the validity of the expense.
This is where things can get interesting, because there is no time limit within which you need to make the reimbursement to yourself. So you could make a number of payments from regular funds for medical expenses, keep the receipts, let the $$ grow tax-deferred and then reimburse yourself at a much later date (decades later, even) by withdrawing funds from the HSA to cover expenses. For example, you could pay $300 for a mole removal this year, save the receipt, wait 20 years, and then withdraw the $300 reimbursement tax-free from a pot of money that’s been invested and compounding untouched for decades.
Keeping receipts digitally in like Dropbox or Google Docs makes the most sense since you may need to store them for a very long time to prepare you for if and when the IRS comes calling asking for proof after you have reimbursed yourself. Only expenses incurred since you first opened your HSA are eligible for reimbursement. Here’s a good article on the reimbursement process.
I am sure you can now begin to see the possibilities of making the HSA an extremely tax efficient additional retirement savings vehicle. Any funds in the account after you turn 65 are now available to you with no penalty (same as a Traditional IRA or 401k after 59 1/2), regardless of what you do with the proceeds although using them for medical expenses after that age make them the most tax efficient vehicle there is.
If you have saved enough and invested wisely with this kind of time horizon in mind, you may have enough in the account, for example, to make supplemental uncovered Medicare payments with tax and penalty free withdrawals from your HSA at that point and thereby maybe not need to purchase any of the Medicare supplemental insurance policies that many people have to buy at that time of their lives.
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