Triple Tax Benefits of a Health Savings Account

Contributed by: Cindy Wysong, CFP®

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What would you guess is one of the most overlooked retirement savings vehicles?  Is it a 401k?  Or a Roth IRA?  While these are great strategies, I would argue the Health Savings Account (HSA) is the most under-utilized strategy.  This might surprise a lot of people because if you are familiar with an HSA, you likely understand you can set aside tax-free money each year and use the savings to pay for medical expenses throughout the year.  While this is a popular use of the savings, one could argue the real power in this investment vehicle is to fund the account, invest the cash, and allow it to grow until retirement.  Let me explain why this is a better approach.

First of all, the tax advantages of a Health Savings Account are pretty incredible, offering a triple tax benefit to its owner.  Yes, you read that correctly.  A TRIPLE TAX BENEFIT. 

1.     Contributions made into the account are tax-free as they can be deducted from income.  

2.     When invested, the balance of the account is allowed to grow tax-free.

3.     Withdrawals for qualified medical expenses are also tax-free.

Let this sink in.  This is pretty exciting, er, at least as exciting as it can get about tax-free investments!  A typical CD at the bank cannot offer this kind of tax advantage.  Even a highly sought-after Roth IRA can’t compete with this.  So why aren’t more people talking about Health Savings Accounts?

For one thing, HSAs are a relatively-new investment strategy, not available on the market until 2003.

Secondly, this investment is not available to everyone.  There are a few restrictions.  An investor can only contribute to an HSA if you are covered under a high deductible health insurance plan (HDHP), you do not contribute to a Flexible Spending Account, you are not enrolled in Medicare, and you are not a dependent on someone else’s tax return. 

If you are eligible, there is an annual limit as to how much you can contribute. For 2025, if you have a family HDHP, the limit is $8,550.  For self-only HDHP, the limit is $4,300.  Additionally, for those aged 55+, you are allowed to contribute an additional $1,000.

Like I mentioned earlier, some people choose to fund the account and use the cash as soon as medical expenses occur.  To the extent you are able to pay for medical expenses with cash on hand, try not to dip into the HSA.  The real power in using these accounts is investing the cash and letting the money grow for as long as possible.  It can be a great asset to tap during retirement. 

What happens if you accumulate a balance that you cannot imagine spending before you die?  Keep your receipts!  You are allowed to use the HSA for any qualified medical expenses incurred after you opened the HSA. 

Example: You opened an HSA in 2020.  You had surgery in 2022, which cost you $10,000 out of pocket.  You paid for the expenses from your cash flow and saved your receipts.  You retire in 2040 and request reimbursement from the HSA for the expenses you paid associated with the surgery 18 years prior!  This is an eligible withdrawal…only now you get to use the funds – which are now worth $30,000 – on whatever you’d like, say, a vacation or a new car.

If you pass away with a balance remaining in your HSA, the account can transfer to your spouse who will enjoy the same tax-free benefits.  If the beneficiary is a non-spouse, the account is distributed to your heir in the year you died and is taxable to your heir. 

You are going to be hard-pressed to find anything in life that’s triple tax-free. Take advantage of this savings strategy, if you are eligible!

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Cindy Wysong is a Partner and Wealth Advisor at BCWM, LLC.

To contact Cindy:

Email:  cindy@bcwm.com

Telephone: (913) 685-2300

www.bcwm.com