Who doesn’t want up to $370,000 tax-free? The power of HSAs.

Updated on 01/19/2025. Please notify us if any of these links break, or if you have your own suggestions or tips, and we’ll do our best to refresh and update content.

A key challenge financial planners face is nudging clients to look far into their own futures. After all, most people are living today, for today. But dealing with tomorrow is much easier if you start planning now! Let me show you how…

An opportunity for building wealth is a Health Savings Account (HSA) paired with a High Deductible Health Plan (HDHP). HSA accounts offer multiple benefits, but first up who probably should not choose a HDHP?

Who Should Skip HDHPs (At Least for Now)

If you're managing chronic health issues, expecting high medical expenses in the coming year, planning elective surgery, growing your family, or if you have no emergency funds to cover the high maximum out-of-pocket that comes with a HDHP, then you'll likely want to skip a HDHP + HSA combination (at least for the coming calendar year…).

Triple Tax Advantage: Why HSAs Are Unbeatable

If you are healthy and expect to stay that way, what's so attractive about the HDHP + HSA combination? HSAs offer triple tax benefits: tax deduction now, tax-deferred growth on invested balances, and tax-free withdrawals for qualified medical expenses later. Win! Win! Win!

1. Cut Taxes Today

You can contribute up to $4,300 (2025) for individual coverage, or up to $8,550 (2025) for family coverage, and deduct those amounts off the top of your adjusted gross income (AGI). Starting at age 55, you can add an additional $1,000 catch-up contribution and with a spouse doing the same in their own separate HSA.

The Real Power of Compound Growth: Perhaps these seem like modest numbers to high earners, but consider this: contributing $4,300 per year, for 20 years, earning 7.5% annually results in $186,210 tax-free! For a couple making the maximum $8,550 contribution for 20 years at 7.5% annual returns, that's $370,255 tax-free!

Start sooner, contribute at the beginning of the year rather than the end, add in the age 55 catch-up contributions, compound for longer, and/or earn higher returns—and that tax-free pot grows even larger.

*Important Note: You can claim the HSA deduction regardless of whether you itemize or take the standard deduction!

2. Invest and Grow Tax-Deferred

These aren't the old "use-it-or-lose-it" FSA accounts. You contribute your money and keep it in the HSA year after year. The real win is treating your HSA like an investment account rather than a savings account with a debit card. Invest the funds while covering out-of-pocket qualified medical expenses with other cash.

Pro Tip: Save those receipts and track your qualified medical expenses to reimburse yourself tax-free—even many years later.

Surprising Qualified Medical Expenses

Many people don't realize the broad range of expenses that qualify for tax-free HSA withdrawals. Beyond obvious medical costs like doctor visits and prescriptions, you can use HSA funds for:

• Over-the-counter medications (Tylenol, allergy medicine, antacids)

• Sunscreen (SPF 15 or higher)

• First aid supplies (bandages, thermometers, blood pressure monitors)

• Dental expenses not covered by insurance (cleanings, orthodontics)

• Vision care (eye exams, glasses, contacts, LASIK surgery)

• Menstrual care products (tampons, pads, menstrual cups)

• Smoking cessation programs and nicotine gum/patches

• Weight loss programs (if prescribed by a doctor for specific medical conditions)

• Acupuncture and chiropractic care

• Mental health counseling and therapy

• Pregnancy and fertility treatments (prenatal vitamins, breast pumps, fertility monitoring)

The IRS maintains a comprehensive list, and the range of qualifying expenses continues to expand, making your HSA even more valuable for everyday health and wellness needs.

3. Tax-Free Withdrawals

HSA funds can be used for qualified medical expenses and Medicare premiums (Parts B, C, and D—unfortunately not Medigap premiums) once you turn 65. They can also cover qualified long-term care premiums, all expenses you may need or want coverage for.

Additional HSA Advantages

• Don't Leave Free Money on the Table

Many employers make partial contributions to your HSA if you elect their HDHP coverage option. Take advantage! You can still personally "top up" your HSA and contribute up to the IRS limit.

• HSAs as Supplemental Retirement Accounts

What if you don't need the money for qualified medical expenses? Starting at age 65, you can withdraw HSA money, pay ordinary income taxes (just like a 401(k) or IRA), and use it for any purpose. It's essentially a supplemental retirement account with better tax treatment during the accumulation phase.

*Important: If you withdraw HSA funds for non-qualified uses before age 65, you'll face ordinary income tax plus a 20% penalty.

• No Income Limits

As long as you qualify for an HSA, you can contribute regardless of your income level. For high earners, this is obviously valuable. For lower earners, HSA contributions reduce household income, potentially helping you qualify for greater insurance subsidies on exchanges.

• Emergency Fund Flexibility

While you can pay or reimburse yourself immediately for qualified medical expenses, you're not required to do so. You can save receipts and choose when to take tax-free distributions, allowing your HSA to grow while using less tax-efficient dollars from other accounts for current expenses.

• Lower Monthly Premiums

Since HDHPs shift more financial risk to you, monthly premiums are typically lower. Your HSA (plus emergency funds) should cover the added risk if you need significant medical care, while lower premiums help fund your HSA contributions.

• Long-Term Care Planning Bonus

If you start early with an HSA and grow it effectively, it potentially becomes a powerful tool for end-of-life care needs. Assistance with activities of daily living (bathing, dressing, eating, transferring, toileting, and continence) can be extremely expensive, making a large pool of tax-free money invaluable.

*Advanced Strategy: Using HSA funds for long-term care expenses would prevent you from deducting those medical expenses should they exceed the IRS AGI threshold, so consider using your HSA for LTC expenses in lower-income years while keeping traditional IRA distributions available for potential deductions in high-expense years. Consult your CPA for the best approach in your situation.

2025 Key Numbers Summary

• Individual Coverage: $4,300 maximum contribution

• Family Coverage: $8,550 maximum contribution

• Age 55+ Catch-up: Additional $1,000 per person

• Minimum HDHP Deductible: $1,650 (individual), $3,300 (family)

The bottom line? HSAs represent one of the most powerful tax-advantaged savings tools available. For healthy individuals and families, the combination of immediate tax savings, tax-free growth, and flexible withdrawal options makes HSAs an essential component of comprehensive financial planning.

Health dietary choices

Fitness and strength training choices

Disclaimer: Clients should note that The Wealth Collective will not provide accounting or legal advice, nor prepare any accounting or legal documents. Clients are urged to work closely with their attorney and/or accountant in implementing our recommendations. However, at the client’s request we may recommend the services of a third-party attorney, accountant, tax professional or other specialist. The Wealth Collective is not compensated for these referrals.