How Can Families Make the Most of Health Savings Accounts (HSAs)?

 Health Savings Accounts (HSAs) offer families a powerful way to save for medical expenses while also benefiting from tax advantages. These accounts are designed to help individuals and families with high-deductible health plans (HDHPs) cover their healthcare costs. When used strategically, HSAs can provide long-term financial benefits beyond just paying for current healthcare needs. Here are some ways families can maximize their HSA:

1. Take Advantage of Tax Benefits

HSAs are known for their triple tax benefits:

• Contributions are tax-deductible: Money you contribute to an HSA reduces your taxable income, lowering the amount of taxes you owe.

• Growth is tax-free: Any interest or investment gains in the HSA grow tax-free, allowing the funds to compound over time.

• Withdrawals are tax-free: Withdrawals for qualified medical expenses are completely tax-free.

By contributing the maximum allowed amount each year and keeping the funds in the account, families can effectively reduce their taxable income and grow their savings tax-free.

2. Contribute the Maximum Allowed

Each year, the IRS sets limits on how much you can contribute to an HSA. For 2025, the contribution limits are:

• $4,150 for individuals

• $8,300 for families

• An additional $1,000 catch-up contribution for those aged 55 and older

If possible, families should aim to contribute the maximum allowable amount each year to take full advantage of the tax benefits and build a substantial health savings cushion.

3. Use the HSA for Medical Expenses

HSAs are primarily designed to cover qualified medical expenses, including doctor visits, prescription medications, dental and vision care, and even some over-the-counter items. By using the HSA to pay for these expenses directly, families can tap into the tax-free withdrawal benefit.

Additionally, keeping receipts for medical expenses that you pay out-of-pocket can be useful. If you don’t immediately use the HSA funds for medical expenses, you can always reimburse yourself later, as long as the expenses were incurred after the HSA was opened.

4. Save for Future Medical Costs

One of the most strategic ways to use an HSA is to treat it as a long-term investment account. Families can pay for current medical expenses out-of-pocket, allowing the funds in the HSA to grow for future medical needs or even retirement. This is particularly useful since healthcare costs tend to rise with age, and HSAs can be a great tool for retirement planning.

For example, if a family doesn't need to withdraw funds for medical expenses each year, they can leave the money in the HSA to accumulate interest or invest it in mutual funds or other options (if available through the HSA provider). This can help create a robust healthcare fund for the future.

5. Invest the HSA Funds

Many HSA providers offer the option to invest the funds in stocks, bonds, or mutual funds, allowing families to grow their savings beyond just the interest earned in a savings account. Investing in the HSA can significantly increase the value of the account over time, especially if the family is not using the funds for immediate medical expenses.

Families should evaluate their risk tolerance and investment options before choosing to invest the funds, but this can be a great way to grow an HSA balance for future healthcare expenses, especially if the family is in good health and doesn’t need to access the funds regularly.

6. Avoid Using the HSA for Non-Qualified Expenses

While it’s tempting to use the HSA for non-medical purposes, doing so comes with penalties. If you withdraw funds for non-qualified expenses before age 65, you will be subject to income tax on the amount withdrawn, plus an additional 20% penalty.

After age 65, you can use HSA funds for non-medical expenses without the 20% penalty, but you will still have to pay regular income tax on the withdrawal. This makes HSAs a potentially good source of income for retirement, as they can serve as an additional tax-deferred savings account.

7. Coordinate with Other Tax-Advantaged Accounts

Families should also consider how their HSA interacts with other tax-advantaged accounts, such as Flexible Spending Accounts (FSAs) or Health Reimbursement Arrangements (HRAs). For example:

• FSAs have “use-it-or-lose-it” rules, meaning that any unused funds at the end of the year are forfeited. If a family is also using an HSA, they should aim to prioritize using FSA funds first for medical expenses, and use HSA funds for longer-term savings.

• HRAs are often employer-funded and can be used in conjunction with an HSA. By coordinating between these accounts, families can maximize their overall tax benefits and minimize out-of-pocket expenses.

8. Track Medical Expenses for Future Reimbursement

If you decide not to use your HSA for current medical expenses, make sure to keep records of all eligible healthcare expenses you incur. You can reimburse yourself for these expenses at any point in the future, even years later, as long as the expenses were incurred after you opened the HSA. This flexibility allows families to let their HSA grow and use it for larger medical costs down the line.

9. Use HSA Funds for Retirement Health Expenses

After age 65, HSAs can be used to pay for healthcare expenses in retirement, making them a valuable tool for retirement planning. Unlike other retirement accounts, such as 401(k)s or IRAs, HSAs are not subject to Required Minimum Distributions (RMDs), meaning they don’t have to be withdrawn at any specific time.

In retirement, the HSA funds can be used to pay for qualified medical expenses like Medicare premiums, long-term care, and prescription drugs, without incurring taxes. This provides a significant advantage, especially as healthcare costs tend to increase with age.

Conclusion

Health Savings Accounts (HSAs) are a powerful tool for families to save on healthcare costs and build long-term financial security. By contributing the maximum allowed amount, using the funds for medical expenses, investing for future healthcare costs, and coordinating with other tax-advantaged accounts, families can maximize the benefits of their HSA and ensure they are well-prepared for future health-related expenses.