Here’s How To Get the Most Out of an HSA Account

Contributing to an HSA is one of the best money moves American savers can make to build wealth. 

Eligible taxpayers can lower their taxable income through HSA contributions. They also can earn money on investments and use the proceeds to pay for medical expenses tax-free.

However, HSAs have strict rules. If you break them — whether intentionally or unintentionally — you could face financial penalties. Here are the best ways to get the most from your HSA.

An HSA is a tax-advantaged account that helps you to save for health care expenses. HSA contributions directly lower your taxable income.

Many HSA plans also allow you to invest your funds in stocks and bonds. Earnings on these investments are not taxable as long as they are used to pay for qualified medical expenses.

Examples of qualified medical expenses include — but are not limited to — the following:

• Over-the-counter and prescription drugs
• Feminine hygiene products
• Physician copays
• Prescription glasses
• Emergency medical care

Now that you understand the benefits of an HSA and how it helps you get ahead financially, let’s move on to ways to get the most out of this account.

To qualify for an HSA, you must be enrolled in a high-deductible health plan. For 2024, deductibles must not be less than $1,600 for individual coverage or not less than $3,200 for family coverage.

In 2025, this amount will be $1,650 for individual coverage and $3,300 for family coverage.

While you can use HSA funds to pay for medical expenses that count toward your deductible, you cannot use them to pay for premiums. Fortunately, plans with higher deductibles typically have lower monthly premiums.

Contributing the maximum amount to an HSA will help you both grow the size of the account and lower your tax bill.

The IRS regularly increases the HSA contribution limits. For 2024, individuals can contribute a maximum of $4,150 to their HSA. If you have family coverage, you can contribute up to $8,3004.

Adults 55 and older can also make catch-up contributions to their HSA accounts. The catch-up maximum is $1,000 for 2024.

In 2025, the contribution limit for individuals is $4,300 and $8,550 if you have family coverage. Adults 55 and older can contribute an additional $1,000.

Make sure you do not contribute more than the maximum amount. If you do so, the IRS could impose a penalty equal to 6% of your excess contributions. The penalty continues for each year that the excess amount remains in the account.

As with a 401(k), some employers offer to match your HSA contributions. This means you can pay for more medical expenses with less of your own money.

Remember that employer contributions count toward your annual HSA contribution limit, so you should factor them in when making your own contributions.

If you want to avoid all taxes and penalties, you must use HSA funds to pay for qualified medical expenses.

If any money in your HSA is used for anything else, you will pay tax on the distribution. But that’s not all. In most cases, the IRS will impose a 20% penalty for the nonqualified distribution.

The exception to this rule applies to people 65 and older. While nonqualified medical expenses are still subject to income tax, those who are at least 65 are not subject to the 20% penalty.

Investing your HSA money in stocks and bonds — often via mutual funds or exchange-traded funds (ETFs) — can help you grow wealth faster. Many, though not all, HSAs offer this option.

As with a Roth IRA, your earnings can grow tax-free and can be withdrawn tax-free when you use them for qualified medical expenses. In addition, contributions to an HSA are also tax-deductible, which is not true of contributions to a Roth IRA.

In essence, contributions to an HSA enjoy triple tax advantages.

HSAs can come in handy during retirement when health care costs tend to become more expensive.

Unlike a flexible spending account (FSA), contributions to an HSA roll over to the next year and can continue to grow year after year as long as you don’t withdraw the money.

If you don’t use HSA money to pay for medical expenses each year and instead leave the account alone, it’s conceivable that you could accumulate tens of thousands of dollars — or more — by the time you retire.

There are many health care expenses that Medicare does not cover. Although you cannot make new contributions to an HSA once you are enrolled in Medicare, you can still tap into the funds you accumulated in previous years.

That means you can use your HSA to pay for many of the extra costs Medicare does not cover. Making sure to leave some money in your HSA during your working years can alleviate health care and financial worries once you leave the workforce.

An HSA can act as an extra retirement account. Once you reach the age of 65, you can withdraw money from your HSA to pay for things other than medical expenses without paying a 20% penalty.

To be sure, you will have to pay taxes on any withdrawal that is not earmarked for a qualified medical expense. But the penalty disappears.

This essentially turns your HSA into an additional traditional IRA if you choose to use it that way.

You can also use your HSA as part of your estate planning if you would like to leave behind a legacy for others.

As with other types of retirement accounts, you can name beneficiaries who will inherit your HSA upon your death. When spouses inherit an HSA, the standard HSA rules apply: They can use the account to pay for qualified medical expenses without paying income tax on withdrawals.

However, other beneficiaries must pay income tax on the money that is in the account, and they cannot use the funds tax-free for medical expenses.

Making the most out of your HSA can benefit you now and later. You save money on your taxes every time you make an HSA contribution.

You can also worry less knowing you have extra funds if a surprise medical expense comes up. And if you so choose, you can boost retirement savings and prepare yourself financially once you and your spouse leave the workforce.

However, it’s important to familiarize yourself with HSA rules. Know how much you can contribute and which expenses qualify for tax-free HSA withdrawals. It’s also a good idea to keep receipts for HSA expenses, just in case the IRS comes calling.