A Health Savings Account, or HSA, is an investment account that helps you save for medical expenses.
According to a study by Peterson-KFF, around 20 million Americans (nearly 1 in 12 adults) owe medical debt. And if you expand the definition to include medical debt on credit cards or money owed to family members, that number jumps to a massive 41% of adults.
This is despite over 90% of the U.S. population having some form of health insurance.
Additionally, Americans spend about 8% of their household budget on healthcare expenses.
I do not want to get into the complexity or perhaps the failures of the U.S. healthcare system today, but those debt numbers seem wild to me. Because the cost of not only healthcare, but also health insurance, seems to be constantly increasing, more and more people are electing for “high-deductible” insurance plans.
A high-deductible health insurance plan allows you to pay less in premiums each month, but in exchange, you have to pay more out of pocket for any medical expenses before your coverage kicks in.
This is where an HSA comes into play.
An HSA is a pre-tax investment account, meaning that your taxable income is reduced by the amount contributed to the account. In other words, you don’t pay taxes on the amount contributed to the account.
For example, let’s say you make $50,000 and put $5,000 of your income into an HSA. On your taxes that year, only $45,000 of your $50,000 would be taxable. In that sense, an HSA functions like a 401(k) or a Traditional IRA.
However, where an HSA differs, and even surpasses the tax benefits of other pre-tax accounts, is it’s the only savings vehicle that offers a triple tax advantage. That’s right, we’re getting into rarified air in terms of tax perks. Contributions to an HSA are tax-deductible, the invested money in the account grows tax-free, and then withdrawals used for qualified medical expenses are also tax-free.
Money contributed to an HSA that’s then used for medical expenses never gets touched by taxes.
Now, in exchange for this cool tax benefit, there are certain stipulations and rules for the account.
As I mentioned above, you can only contribute to an HSA if you’re enrolled in a high-deductible health insurance plan. Each plan is different, so be sure to check with your provider before opening an account, but most plans with a family deductible above $3,500 are HSA eligible.
There’s also a limit on how much you can contribute each year. For 2025, you can stash away up to $4,300 as an individual or up to $8,550 for family coverage.
And if you take money out of your HSA for anything other than qualified medical expenses, those funds are subject to ordinary income tax and a 20% penalty. The exception is that once you turn 65 years old, you can use HSA funds for non-health-related purchases without incurring a 20% penalty; you’d just owe income tax on the withdrawals, which effectively turns your HSA into a Traditional IRA.
What constitutes a “qualified medical expense?”
Typically, these would be expenses like doctor visits, surgery, hospital care, medication, dental and vision care, chiropractor visits, medical equipment, therapy, braces, etc. Do not take this as official tax advice, but in my experience, the IRS is fairly lenient on what qualifies as a medical expense.
Before you ask, no, you can’t use HSA funds to pay your health insurance premiums. That is, unless you’re 65 or older and enrolled in Medicare, on COBRA coverage, or have coverage through your state unemployment program.
On the surface, utilizing an HSA is a smart way to prepare for short-term medical needs while also lowering your tax bill. But even if you’re healthy and don’t anticipate any medical costs in the near future, you can still contribute and simply use the account as a long-term investment vehicle.
An HSA is a versatile account that can serve a variety of purposes. You might need to save for an immediate medical need. Or maybe you just want additional tax deductions on top of your 401(k) contribution. Or maybe you’re looking for more places to stash away money for retirement.
Whatever the reason, an HSA is worth checking out.
Thanks for reading!
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.