How to Use an HSA the Right Way

Contribution Eligibility & Limits

To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). This is the baseline requirement that unlocks access to all the HSA’s benefits.

2025 HSA Contribution Limits:

• $4,300 for individuals
• $8,550 for families
• Additional $1,000 catch-up contribution if age 55 or older

These contributions can be made with pre-tax dollars (via payroll) or deducted from your taxable income at year-end.

The Triple Tax Advantage

The HSA stands apart from other tax-advantaged accounts because of its triple tax benefit:

1. Tax-deductible contributions
2. Tax-free investment growth
3. Tax-free withdrawals for qualified medical expenses

No other account offers all three.

How to Optimize Your HSA

Most people treat their HSA like a checking account for health expenses. But if you want to build wealth, you need to treat it like an investment account.

Here’s how:

Pay for medical expenses out of pocket
Use a credit card or other funds to cover costs upfront. Save the receipts and documentation.

Don’t reimburse yourself immediately
There’s no time limit for reimbursing qualified expenses. This means you can allow your HSA funds to grow for decades before taking a tax-free distribution for something you paid for years ago.

Invest the balance
If you don’t need the funds short-term, invest your HSA. Many providers offer mutual funds or ETFs once you reach a minimum balance (often $1,000 or $2,000).

This strategy allows your HSA to grow significantly over time — with all the growth tax-free if eventually used for eligible medical costs.

What Happens at Age 65

At age 65, your HSA becomes more flexible:

• You can still withdraw funds tax-free for qualified medical expenses.
• You can also withdraw for non-medical expenses without penalty — though you’ll owe regular income tax, just like with a traditional IRA.

In essence, your HSA becomes another retirement account — one with the added advantage of tax-free distributions for healthcare, which is likely to be one of your biggest expenses in retirement.

Estate Planning Considerations

While HSAs are excellent during your lifetime, they are not ideal to leave behind.

If your spouse inherits the account, it remains an HSA. But if someone else inherits it, the entire account becomes taxable to them in the year of your death — unlike Roth IRAs, which allow for tax-deferred growth over time.

This makes it wise to spend down your HSA in retirement, especially if you anticipate large healthcare costs or if you’re in a position to reimburse yourself for decades of past qualified expenses.

Final Thoughts

The HSA is often overlooked or underutilized. But when used correctly, it becomes a highly effective tax and retirement planning tool.

Summary of Best Practices:

• Max out your HSA contributions each year
• Cover current medical expenses out of pocket and save the receipts
• Invest your HSA balance
• Delay reimbursements to maximize growth
• Use the funds strategically during retirement
• Draw it down before death to avoid unfavorable estate taxation

By thinking of your HSA as a long-term savings account rather than a short-term spending account, you can unlock one of the most efficient vehicles available in personal finance.

Sources and References

Healthcare.gov – https://www.healthcare.gov/high-deductible-health-plan/hdhp-hsa-work-together/