Here are 3 Great Reasons to Fund a Health Savings Account
1) Contributions are Tax Deductible
To contribute to a Health Savings Account (HSA) you need to be eligible. To qualify you need to have a High Deductible Health Plan (HDHP). There are two requirements for this. Having a minimum deductible and a maximum out of pocket expenses (deductibles, co-payments, and other amounts, but not premiums.)
In 2025, families need a minimum deductible of $3,300 and maximum out of pocket expenses of $16,600. Individuals are one-half of these amounts, $1,650 and $8,300, respectively.
Additionally, to be eligible, you cannot be covered by your spouse’s health plan, Medicare or be claimed as a dependent on someone else’s tax return. Finally, you cannot participate in another health savings account like a Flexible Spending Account (FSA).
There is no earned income requirement to have an HSA like there is with a Traditional IRA or a Roth IRA. Earned income is from your wages as an employee or your income earned from self-employment.
Also, there is no limit on the amount of income you earn to have an HSA like there is with a Traditional IRA or Roth IRA. If you meet the requirements above, there is no limit on what you earn to be eligible.
In 2025 eligible families can contribute up to $8,550, singles up to $4,300. Additionally, taxpayers aged 55 and older can make a $1,000 “catch up contribution.” The IRS annually indexes the deductible, maximum out of pocket expenses and maximum annual contribution to inflation.
Contributions to an HSA are income tax deductible. They are deductible ‘above the line.’ This means they are deductible in arriving at Adjusted Gross Income (AGI). This is beneficial for Connecticut Income Taxpayers as AGI is the starting point to calculate Connecticut Income Tax. They will get a both the federal and state income tax deduction.
HSA contributions can be made anytime during the calendar year and up to due date of your income tax return, which is April 15th.
Some employers will offer an HSA plan at work for their employees. If you contribute to your employer sponsored HSA plan pre-tax, there is no additional tax deduction for that amount.
Also, if your employer makes an HSA contribution on your behalf, there is no tax deduction for the employee.
Review your W-2 Form and look at Box 12, Code “W”. This lists both any employee pre-tax contribution and any employer contribution.
A huge advantage of an HSA over an FSA is that there is no “Use it or lose it” annual policy. This means if you do not spend all the funds you put into the FSA that year, you lose them.
Ouch.
There are two exceptions to this. If your employer’s plan allows for it, in 2025 you can carryover $660 into the following year. Additionally, if your employer’s plan allows for it, they can offer a grace period for 2.5 months after the year end. This allows the employee some extra time to spend their FSA funds. Check with the employers Summary Plan Description which documents the rules and regulations of the FSA.
2) Distributions Are Not Required
There are no annual distribution requirements from an HSA. This makes the HSA an exceptional tool to allow for (potential) tax-free growth. See below.
While not required, distributions may be necessary. Face it, there is only so much money to go around. Medical, and other bills come in each month. They need to get paid. Distributions can be made for qualified medical expenses from the HSA anytime.
However, if you have the resources from another source to pay your medical bills, use them. You can reimburse yourself later. Let the funds in your HSA grow over time. Most HSA providers will allow participants to invest their HSA account. Many providers will offer a menu of mutual funds to choose from. Some of the largest HSA providers are Lively and Fidelity.
Oh, and all the Average Joe’s will need all the help they can get. According to Fidelity, a married couple aged 65 should expect to pay $330,000 for health care in retirement. The average married couple age 65 estimates their costs at $150,000. This is less than half Fidelity’s estimate. 1)
This means you need to fund your HSA. The tax advantages are huge. For example, if you invested $8,550 annually for 25 years and got a 10% return, you would have over $840,000. If this were reimbursed to you for your qualified medical bills over the past 25 years, this would be federally tax-free to you. Repeat:
Tax-Free to you.
This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed, and investment yields will fluctuate with market conditions. 2)
It is important to maintain good documentation to support your qualified reimbursements to yourself.
3) Qualifying Distributions are Tax-Free
Qualifying distributions from an HSA are tax-free. Distributions can be for you, your spouse, and dependents. Qualifying distributions are medical expenses approved by the IRS. Some of the more common ones are:
• Doctor bills
• Prescriptions
• Vision care
• Dental care
Qualifying distributions are limited to distributions that are made after the HSA was opened.
Insurance premiums are not eligible unless they are one of the following:
• Long-term care insurance
• Health care continuation coverage (COBRA)
• Health care coverage while receiving unemployment benefits
There is an age-based limit on the deduction of long-term care premiums paid. For example, in 2025, taxpayers aged 40 and less are only allowed to deduct $480. At the other end of the spectrum, taxpayers aged 71 and older are allowed to deduct $6,020. The IRS has a table to show increasing amounts are allowed as taxpayers get older. The IRS also indexes the deduction annually for inflation.
For taxpayers aged 65 and older qualified distributions include Medicare premiums Part B, D and C. However, you cannot use your HSA however to pay Medigap premiums.
Be cautious here. Distributions used for non-qualified medical expenses results in taxable income. Additionally, if you are under age 65 and have distributions used for non-qualified medical expenses, there is an additional 20% penalty. The only exceptions to this penalty for non-qualified expenses is being aged 65 or older, disabled or death.
See IRS Publication 502, Medical and Dental Expenses and Publication 969, Health Savings Accounts for details.
It is important to name a beneficiary and contingent beneficiary on your HSA. Typically, you would name your spouse as your beneficiary. Common examples of contingent beneficiaries are your children, grandchildren, or other family members.
If you inherit your spouse’s HSA, this becomes your HSA. All qualifying distributions would continue to be tax-free.
However, a non-spousal beneficiary does not get this tax favored treatment. When the HSA owner with a non-spousal beneficiary passes away, the HSA ceases to exist. The fair market value of the HSA is included in the gross income of the HSA owner in the year of death.
If there is no beneficiary, the HSA account is treated similarly to having a non-spousal beneficiary.
Action Item
If you need assistance with your Health Savings Account, call us at (860) 645-1515 or E-Mail Thomas.scanlon@raymondjames.com.
1) Newsroom.fidelity.com – August 8, 2024
2) Contributions, earnings, and distributions may or may not be subject to state taxation.
This is original content written by Manchester, CT Financial Advisor, Thomas F. Scanlon, CFP®, CPA.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete, it is not a statement of all available data necessary for making an investment decision, it does not constitute a recommendation. Any opinions are those of Thomas F. Scanlon and not necessarily Raymond James.
Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Change in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.