Stop Ignoring Your HSA: The Most Overlooked Tax Break In America
- Kirk Reagan
- Feb 11
- 8 min read
Updated: Feb 12
If your employer offers a Health Savings Account (HSA) and you are not using it, you are walking past what might be the single best tax deal available to you today.
A lot of people either never enroll or they treat their HSA like a flexible spending account where money goes in, gets spent in the same year, and the balance goes right back to zero. That is a big mistake.
Used correctly, an HSA is a powerful long term wealth building tool that is uniquely tax advantaged and incredibly flexible in retirement. It is even better than your 401k or Roth IRA!
What Is A Health Savings Account?
A Health Savings Account is a pretax savings account that you can use to pay for qualified healthcare expenses. Contributions are made before tax, the money can be invested, and you can use the funds to pay for eligible expenses now or any time in the future.
If you get to retirement and you do not need all the funds for healthcare, there is even a backup plan. After age 65, you can use HSA funds for non-medical expenses and the account essentially behaves like a traditional IRA. In that case, distributions are taxed as ordinary income, but there is no penalty.
So do not worry that you will “over save” in an HSA. There is always a way to use the money.
Another key difference from an FSA. Your HSA is owned by you, not your employer. If you change jobs, you take the entire balance with you. The account is portable throughout your career.
HSA Eligibility: Who Can Use One?
To contribute to an HSA, you need to be enrolled in a qualifying high-deductible health plan (HDHP) and meet some specific rules.
For 2025:
Minimum deductible: 1,650 dollars per person 3,300 dollars per family
Your plan can have a higher deductible, but not lower.
On the other side, there is a cap on what you can be required to pay out of pocket:
Maximum out of pocket: 8,300 dollars for an individual 16,600 dollars for a family
These are the 2025 limits.
The plan also cannot reimburse non preventive care before you hit that deductible, and you cannot be covered by another non qualifying health plan at the same time. For example, you cannot be on a high-deductible health plan at work and also covered by TRICARE or Medicare and still be HSA eligible.
A few important disqualifiers:
TRICARE coverage makes you ineligible for HSA contributions.
Being on Medicare also makes you ineligible.
Having a general-purpose FSA that covers your medical deductible will disqualify you too.
There is one exception that can work with an HSA. A limited purpose FSA that only covers dental and vision, but not medical deductibles, can be paired with an HSA in some employer plans.
If you are on a qualifying high-deductible health plan, you are not on Medicare or TRICARE, and you do not have a conflicting FSA, you should be looking closely at the HSA option.
2025 HSA Contribution Limits
For 2025, you can contribute:
4,300 dollars if you are on an individual high deductible health plan
8,550 dollars if you are on a family high deductible health plan
If you are married and both spouses are on separate family plans, the combined limit is still 8,550 dollars total. You can split it between your HSAs however you like, but you cannot double it.
If you are age 55 or older, you can make an additional 1,000 dollar “catch up” contribution. If both spouses are over 55, each can contribute an extra 1,000 dollars to their own HSA, which can bring a family’s total to 10,550 dollars.
Employers can also contribute to your HSA. Some offer seed money or a match. Those contributions count toward the limit, but they are essentially free money, so you want to be sure you are capturing the full benefit.
The Triple Tax Advantage
Here is what makes an HSA unique. It is the only account that offers all three of these tax benefits:
Tax free contributions Contributions are made pretax, which reduces your taxable income in the year you contribute.
Tax free growth Once the money is in the account, investment earnings grow tax free. No capital gains, no tax on dividends inside the account.
Tax free withdrawals for qualified expenses When you use the money for qualified healthcare expenses, the withdrawals are tax free as well.
There is no other account structure that gives you pretax contributions, tax free growth, and tax free qualified withdrawals.
Used well, this can be more powerful than a traditional 401(k) or IRA for part of your long-term planning.
The Biggest Mistake: Treating Your HSA Like A Checking Account
Most people fund their HSA and then swipe the HSA card every time they go to the doctor or pharmacy. The money never has a chance to grow. They are basically using it as a tax advantaged pass through.
A better strategy is to treat your HSA like a long term investment account.
Here is how:
Pay current medical expenses out of pocket whenever you reasonably can.
Leave HSA contributions in the account and invest them for long term growth.
Choose low-cost index funds or a diversified investment lineup when your HSA provider gives you that option. Many people never log in and realize that their HSA is sitting entirely in cash.
You want those dollars compounding for 20, 30, even 40 years, not stuck earning almost nothing.
The Power Of Saving Receipts
This part surprises a lot of people.
There is no immediate time limit to reimburse yourself from your HSA. If you have an eligible healthcare expense in one year, you can pay out of pocket, keep the receipt, and then reimburse yourself from your HSA decades later, as long as:
The expense was incurred after the HSA was established
You keep proper documentation
That means you could pay a medical bill in 2025, let your HSA grow for decades, and then in, say, 2045, pull money out tax free using that old receipt.
The practical takeaway:
Save every receipt for eligible medical expenses.
Scan them, back up the files, and keep hard copies.
Organize them in a way that your future self can actually understand.
In retirement, those receipts become a pool of tax free spending flexibility.
What Counts As An Eligible HSA Expense?
HSA funds can be used for a wide range of healthcare costs, including:
Deductibles, copays, and cost sharing
Dental and vision expenses
Prescription medications
Many over the counter drugs
Certain long term care premiums
In retirement, your Medicare premiums are also eligible HSA expenses. Medigap premiums are not, but Medicare itself is.
Beyond that, many out of pocket care expenses qualify. IRS Publication 502 gives the full list, but the key point is that HSAs cover far more than just a doctor’s visit copay.
The Age 65 Rule: Your Built In Backup Plan
One of the most flexible features of an HSA is what happens after age 65.
Before age 65, non-qualified withdrawals are hit with both income tax and a 20 percent penalty.
After age 65, you can withdraw funds for any purpose. Non-qualified withdrawals will be taxed as ordinary income, but there is no penalty.
At that point, your HSA behaves much like a traditional IRA. It was tax free going in, it grew tax free, and it is taxable when taken out for non-medical reasons.
That means the worst case scenario for a well-funded HSA is that it functions just as well as a traditional IRA in retirement, and potentially better if you continue to use it for qualified healthcare expenses.
What Happens To Your HSA When You Die?
Beneficiary planning with an HSA is important, especially if you build a large balance.
If your spouse is the beneficiary, the HSA simply becomes their HSA. The tax benefits continue and the account stays intact.
If a non-spouse, such as an adult child, is the beneficiary, the entire balance is treated as taxable income to them in the year of your death. There is no penalty, but the tax bill can be significant.
If there is no beneficiary listed, the HSA flows to your estate and is taxable to the estate in that final year.
In other words, HSAs are not ideal as large inheritances for non spouse beneficiaries. As you age, it can be wise to gradually use the funds for your own qualified expenses or intentionally treat the account like a traditional IRA after 65, so you do not leave behind a large, taxable lump sum.
Why HSAs Matter For Veterans
For retirees using TRICARE, HSAs are unfortunately off the table. TRICARE coverage makes you ineligible, and the same is true once you enroll in Medicare.
However, for veterans who have separated from service and now work in the private sector, HSAs can be a huge opportunity.
If you:
Are a veteran but not a military retiree
Are covered by a qualifying high deductible health plan through your employer
Use VA care infrequently enough to maintain eligibility
Then you may have access to this triple tax advantaged account that many of your peers in uniform never had during their service.
That combination of employer sponsored HDHP plus HSA can be a powerful part of your long term financial independence plan.
How To Maximize An HSA
If you are eligible, here is a simple framework to get the most out of your HSA:
Contribute up to the limit every year Aim for the full 4,300 dollars for individuals or 8,550 dollars for families, plus catch up contributions if you are over 55.
Invest the funds for long term growth As soon as your HSA balance is high enough to access investment options, move surplus cash into low cost, diversified funds rather than leaving it all in a savings account.
Pay current medical costs out of pocket when feasible Let the HSA grow and keep your spending receipts instead of tapping the account every time you see a doctor.
Store and back up your receipts Create a system to scan, label, and back up every eligible healthcare receipt so you can reimburse yourself later.
Use the account strategically in retirement In retirement, use HSA funds first for Medicare premiums, healthcare, and long term care expenses, all tax free. As the account grows, consider using it like a traditional IRA for non-medical expenses after 65, while being mindful of the impact on your heirs.
Key Takeaways
HSAs are the only account with a true triple tax advantage.
They are portable and owned by you, not your employer.
There is no time limit to use the funds for qualified expenses.
When used properly, HSAs are a powerful tool for long term financial independence, not just a reimbursement account.
If you are in open enrollment season, this is the time to act:
Review your employer’s benefits.
Confirm whether your health plan is HSA eligible.
Understand where your contributions will be held and how you can invest them.
Enroll and set up your contributions so they start automatically.
A well-used HSA can quietly become one of the most valuable accounts in your entire financial plan. Do not leave that opportunity sitting on the table.
The information shared in this post is for educational purposes only and should not be viewed as personalized financial advice. Everyone’s situation is different, and you should speak with a qualified financial professional before making decisions about your own benefits, investments, or retirement planning. All opinions are my own.
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