How to Use a Health Savings Account (HSA) to Maximize Tax Benefits

Many people think of a Health Savings Account (HSA) as simply a way to pay for medical expenses, but its true potential extends far beyond that. With its unique triple tax advantage, an HSA can serve as both a short-term healthcare fund and a long-term investment tool. In this article, we will explore how to use a HSA to maximize tax benefits.

 

High Deductible Health Plan Requirement

Before getting into the details and features of an HSA, it is important to note that in order to qualify and make contributions to an HSA, your health plan must meet the definition of a High-Deductible Health Plan (HDHP) per the IRS.  While you can maintain and manage an existing HSA even if you are no longer enrolled in a HDHP, you cannot make new contributions.  You must currently be a HDHP to contribute.

Understanding the Triple Tax Advantage of HSAs

What makes HSAs so special is their triple tax advantage:

• Tax-Deductible Contributions: Funds you contribute to your HSA reduce your taxable income for the year, helping you pay less in federal and state taxes. These contributions can be made through payroll deductions or direct deposits, often pre-tax.
• Tax-Free Growth: Unlike a standard savings account, HSA funds can grow through investments such as mutual funds or ETFs. All earnings on your HSA balance grow tax-deferred (tax-free if used for qualified medical expenses, meaning compounding works even harder over time.
• Tax-Free Withdrawals for Qualified Expenses: When HSA funds are used for qualified medical expenses—like doctor visits, prescriptions, dental care, and vision care—withdrawals are tax-free. This is a huge advantage compared to regular taxable accounts.

Maximizing Your HSA Contributions

Contributing the maximum allowed amount to your HSA is a simple but powerful strategy. For 2025, the IRS allows:

• $4,300 for individuals
• $8,550 for families
• An additional $1,000 catch-up contribution for individuals 55 and older

Making the most of these contributions, especially early in the year, gives your HSA more time to grow and can compound your tax savings.

Investing Your HSA for Long-Term Growth

One of the most underutilized features of HSAs is their investment potential. Unlike FSAs, HSA funds roll over year to year and can be invested for growth (depending on your HSA provider/platform). Over time, a well-managed HSA can become a substantial account that supports healthcare costs in retirement or even supplement other retirement income sources.

Our team of fiduciary financial advisors at Tenet provide clients with guidance on:

• Choosing the right HSA investment options, such as mutual funds or ETFs
• Balancing liquidity for near-term healthcare needs with long-term growth potential
• Coordinating HSA investments with broader retirement planning strategies

Think of your HSA as a mini-retirement account with the bonus of tax-free withdrawals for qualified medical expenses.

Using HSA Funds for Qualified Medical Expenses

HSA funds are tax-free when used for qualified medical expenses, which can include:

• Doctor visits and hospital services
• Prescription medications
• Dental and vision care
• Over-the-counter medications (with prescription)
• Certain long-term care services

Keeping detailed records is essential to remain compliant with IRS rules (IRS Publication 969).

Strategic HSA Use in Retirement

Another unique feature of an HSA is that after age 65, the funds can be used for non-medical expenses without penalty (though they will still be taxed as ordinary income). This flexibility makes HSAs a valuable tool for retirement planning, complementing IRAs and 401(k)s. Essentially, your HSA then becomes like another IRA that can be used for retirement lifestyle expenses.

Integrating HSAs Into Your Financial Plan

An HSA works best when integrated into a comprehensive financial plan. Our fiduciary advisors at Tenet help clients:

• Determine optimal contribution levels each year
• Select investment options aligned with retirement goals
• Coordinate HSAs with other accounts such as IRAs, 401(k)s, and Roth IRAs
• Leverage HSAs to reduce taxable income while planning for healthcare in retirement

With all of the benefits that an HSA provides, they can become an integral part of your overall, long-term financial plan.

The Bottom Line

A Health Savings Account is much more than just a healthcare fund – it’s a versatile, tax-advantaged vehicle that can grow alongside your retirement plan yet be used for qualified medical expenses. Utilizing the “triple tax-advantaged” features of an HSA can provide several benefits both for health expense as well as retirement cash flow at age 65.

At Tenet Wealth Partners, we guide clients how they can integrate HSAs into their financial strategies – ensuring they take full advantage of their accounts while staying aligned with overall retirement planning goals. Reach out to our team today to discuss how an HSA may be an appropriate consideration for you. Contact us or schedule a consultation.

 

 

Disclosure: Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice.This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations.