The Hidden Power of Health Savings Accounts: A Triple Tax Advantage
What if there was a way to set aside money, watch it grow tax-free, and spend it tax-free - all while saving on your healthcare costs? That’s exactly what a Health Savings Account (HSA) offers. Yet, many American workers aren’t fully leveraging this powerful financial tool.
Since 2003, Americans covered under a High Deductible Healthcare Plan (HDHP) have been able to establish an HSA. The account can be used for qualified health expenses now or in retirement, making them a valuable part of your financial planning process.
Tax Free Trifecta
Contributions are made into the HSA on a pre-tax basis, with a contribution limit for an individual or family plan1. An employer may offer a plan at a designated custodian where payroll deducted contributions would be deposited. If payroll deduction is not an option, then an employee may make contributions to an HSA custodian of their choice and deduct the eligible contribution on their tax return.
The contributions are invested, and the earnings grow tax-free. Depending on the custodian, investments can range from cash, mutual funds, ETFs, and individual stocks and bonds. This allows for investment diversification for immediate and long-term needs.
Distributions that are for Qualified Medical Expenses are not taxable. These are costs incurred for medical care that would be deductible as medical expenses according to the IRS2. Distributions that do not meet the requirements of Qualified Medical Expenses are subject to ordinary income tax and a 20% penalty if the taxpayer is under age 65.
An HSA does not have a “use it or lose it” requirement like most Flexible Savings Accounts. An HSA does not need to be spent each year and is portable throughout your working years and into retirement.
An Employer May Benefit Too
Beyond the tax-free trifecta the employee benefits from, the employer is offering a valuable benefit to attract and retain employees. The employer is showing they care about the physical and financial wellness of their employees. Those two combined leads to better mental wellness and a more engaged workforce.
Additionally, the employer may benefit financially. An HSA must be offered in conjunction with an HDHP, which typically is less expensive than traditional health insurance. The HSA provides the employer with tax savings by not having to pay payroll taxes on the employee contributions to the HSA. An employer can also elect to contribute to the employee’s HSA, which is a federal tax-deductible contribution.
Using an HSA in Retirement
A 65-year-old retiring today could spend $165,000 on health care in retirement 3. That’s without the unexpected happening. An HSA can be a powerful source of income for part of your retirement health care needs. Distributions for qualified medical expenses, including Medicare premiums (B, D, and Advantage), deductibles, and co-pays, can be paid from your HSA tax free.
You can take a distribution for any reason from an HSA after age 65 and not be subject to the 20% penalty. The distribution is still taxed as ordinary income. Unlike qualified retirement plans and most IRAs, an HSA does not require distributions to be made. This means you can pass the money to your designated beneficiary(ies) at your death.
Once you reach age 65, you can no longer make contributions to an HSA, so proper planning and budgeting for retirement and health care savings are important early on in your working years.
Long-Term Care Needs
Private insurance and Medicare generally do not cover long-term care (in-home care, assisted living, nursing home care). An HSA can be used tax-free to pay for those qualified expenses 4.
Additionally, an HSA can be used tax-free to pay a portion of Long-Term Care insurance premiums. The qualified portion is based on your age at the end of the tax year, and while it is not the full premium amount, it may be an option to help offset the cost of Long-Term Care insurance.
HSAs are a powerful tax planning and healthcare savings tool for today and in retirement. If you're eligible for an HSA, it’s worth exploring how it fits into your overall financial and retirement plan. Talk with your advisor to start maximizing the triple tax advantage today.
by Erika Ferris, CFP®
Director, Retirement Plans/ Financial Planning
Disclosures & Important Information
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and The Wealth Consulting Group are separate entities from LPL Financial. LPL Tracking Number: 746780
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
1 IRS HSA limits 2025: HDHP Individual coverage, $4,300; HDHP Family coverage, $8,550; Catch-up contributions age 55 and older, $1,000-$2,000.
2 IRS Publication 969, www.irs.gov
3 “Fidelity Investments® Releases 2024 Retiree Health Care Cost Estimate as Americans Seek Clarity Around Medicare Selection”, August 8, 2024, www.fidelity.com
4 “Is Long Term Care HSA Eligible?”, www.hsastore.com
