What is a Health Savings Account (HSA)?

How an HSA Works

To open an HSA, you'd need to be enrolled in a qualifying HDHP and not have insurance coverage through other health insurance plans (including Medicare). Instead of paying insurance premiums, you and your employer contribute HSA funds up to annual limits set by the federal government's Internal Revenue Service (IRS). Funds can then be used tax-free for any qualified medical expenses. If you don't use all of the funds, they can be invested for potential growth—similar to how your retirement account works.

Triple Tax Advantages of HSAs

Health Savings Accounts (HSAs) stand out for their unique tax benefits, making them a smart way to save for medical expenses::

1. Tax-deductible contributions: Reduce your taxable income for the year by contributing to your HSA.
2. Tax-free growth: Your HSA funds grow tax-free, allowing your savings to compound over time.‍
3. Tax-free withdrawals for qualified medical expenses: Withdrawals for qualified medical expenses are tax-free, simplifying saving for healthcare.

HSA Contribution Limits

The IRS sets annual contribution limits for HSAs and adjusts them every so often to account for inflation. For 2025, the contribution limits are:

• Individual contribution limit: Up to $4,300
• Family coverage contribution limit: Up to $8,550 (if other family members contribute to the same HSA)‍
• Catch-up contribution: An additional $1,000 for individuals (55 and over)

Make sure to contribute on time, though, as the deadline for 2025 HSA contributions is the tax return filing deadline for next year on April 15, 2026. You can visit the IRS Government website for more information on 2025 limits.

Qualified Medical Expenses

You can use your HSA for a broad range of HSA-eligible medical expenses including visits to your doctor, prescription drugs, dental expenses, vision care such as eyeglasses, and even long-term care. Whichever qualified expenses you have, be sure to keep accurate records and hang on to your receipts—the IRS can request documentation that supports the validity of the expenses and use this information to ensure the funds were used correctly.

Note: If you're under 65 and use HSA funds for non-qualified expenses, significant penalties may apply. You could face federal income taxes on the withdrawal amount as well as a 20% tax penalty.

HSAs vs. Other Health Accounts

Other health-related savings accounts such as Flexible Spending Accounts (FSAs) have more of a "use it or lose it" policy when it comes to your funds. This can often lead to unused funds going to waste and general frustration about your coverage. Conversely, the money in your HSA account can be rolled over each year for more flexibility and increased savings potential. There are also Health Reimbursement Arrangements (HRAs) which are controlled and funded by employers, but an HSA provides you with more portability and investment options because it can be funded by both you and your employer—and it's your own HSA that you individually control.

Advantages of Health Savings Accounts

• Remains with you. Your HSA stays with you even if you change jobs or retire which gives you continuous access to your funds.
• No expiration. Unlike other accounts where you can lose unused funds, HSAs allow you to roll funds over to another plan year, over and over.‍
• Growth potential. You can invest your HSA balance into a range of investment options such as stocks, mutual funds, exchange-traded funds (ETFs), and more.

Potential Drawbacks of HSAs

• HDHP requirement. You have to be enrolled in a high-deductible health plan in order to qualify for an HSA. This may or may not meet the healthcare needs of everyone.
• Higher initial costs. HDHPs usually have higher deductibles which means you'll pay more out-of-pocket before your insurance coverage applies.‍
• Ongoing documentation:. You'll need to keep detailed records of all HSA transactions and your qualified medical expenses to remain compliant with IRS regulations.

HSAs and Retirement Planning

You can use your HSA as a powerful retirement savings vehicle and access unique benefits beyond just healthcare coverage. After you reach the age of 65, HSA withdrawals can be made for non-medical purposes, free from the usual 20% tax penalty (although income tax would still apply). This sort of flexibility means you can use your HSA similar to a traditional IRA as it provides an additional tax-advantaged savings option.

How a PensionBee IRA Can Help

PensionBee simplifies retirement planning, and when combined with a Health Savings Account (HSA), you’re on your way to a confident retirement. Start today and let PensionBee help you be retirement confident!