Making the Most of Your Health Savings Account (HSA)

By Daniel Side, CFP® – Financial Planning Officer

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals with a High Deductible Health Plan (HDHP) cover medical expenses. An HSA offers a unique opportunity to manage healthcare costs while building savings through triple tax advantages:

1. Contributions are tax-deductible
2. Funds grow tax-deferred, including earnings and interest
3. Withdrawals are tax-free, if used for qualified medical expenses

Contribution Rules & Eligibility

To contribute to an HSA, you must be covered by a qualifying HDHP before December 1 of the tax year. Contributions for the current tax year can be made until April 15 of the following year (or when your tax return is filed, if earlier). Unlike IRAs, HSAs do not require earned income to contribute.

2025 Contribution Limits:

• Individuals: $4,300
• Families: $8,550
• Age 55+: Additional $1,000 catch-up contribution per eligible person

Employer Contributions:

Contributions from your employer are included within the annual limit.

Spousal Contribution:

If both spouses are age 55 or older and covered under a family HDHP, each can make a catch-up contribution but only to their own HSAs.

Special Rule for Adult Children:

If your non-dependent adult child is covered under your family HDHP, they can open and fund their own HSA, essentially doubling the total contribution opportunity for the family.

The “Last Month Rule”:

If you’re covered by an HDHP by December 1, you can contribute the full eligible amount for that tax year, provided you remain covered by an HDHP for the following year. If not, excess contributions (and related earnings) become taxable and subject to a 10% penalty.

Best Practices to Maximize Your HSA

Many people use their HSA to cover immediate medical costs, but a more strategic approach can yield greater financial benefits.

• Max Out Contributions: The more you contribute, the more you benefit from tax-deferred growth and tax-free withdrawals.
• Utilize Payroll deductions: If your employer offers HSA payroll deductions, this strategy can provide additional tax savings by avoiding FICA taxes.
• Invest Your Balance: If your HSA allows, invest your balance for long-term growth. Cover current healthcare costs with other resources when possible.
• Save for Retirement Healthcare: HSAs have no “use-it-or-lose-it” rule. Unused balances roll over indefinitely and can fund future healthcare expenses, including Medicare premiums.
• Time Your Reimbursements: You can reimburse yourself for qualified expenses anytime your HSA is opened. By saving receipts, you can delay reimbursements and allow your funds to keep growing.

Additional Considerations

HSAs offer compelling and unique benefits, but careful planning is required to maximize their effectiveness and avoid pitfalls.

• Medicare Enrollment: You can’t contribute to an HSA once enrolled in Medicare. If you delay Medicare past age 65, be careful because Medicare’s retroactive coverage rule could disqualify HSA contributions made in the six months before enrollment. If your spouse is on Medicare but you still have family HDHP coverage, you can continue contributing to the family limit.
• Non-Qualified Withdrawals: Before age 65, withdrawals for non-medical expenses are taxed and incur a 20% penalty. After age 65, non-medical withdrawals are taxed as regular income, but no penalty applies.
• Inheritance Rules: If your spouse inherits your HSA, they can use it for qualified medical expenses tax-free. If anyone else inherits it, the account becomes fully taxable to them in the year they receive it. To avoid unnecessary taxes, review your beneficiary designations and broader estate plan.

Is an HSA Right for You?

HSAs offer compelling benefits but are only available when paired with a compatible HDHP. Traditional health plans, by comparison, typically offer lower deductibles, predictable copays, and broader provider networks, which are features that may better suit those with ongoing medical needs or high prescription costs. For those comfortable with higher deductibles, combining an HDHP with an HSA can reduce premiums while building a tax-efficient healthcare fund for the future.

For more guidance on how your HSA fits into your overall financial plan, contact your Central Trust team today.