The Importance of a Health Savings Account

02/02/2025

If you are enrolled in a health plan with a minimum deductible of $1,600 ($3,200 if married) and a out-of-pocket maximum that does not exceed $8,050 ($16,100 if married), you are most likely eligible to contribute to a Health Savings Account (HSA).

A Health Savings Account is an account specifically designed to spend on medical care. Every contribution is a write-off, meaning you do not have to pay taxes on the amount contributed. You do not pay taxes on any growth in the account, and assuming you use the funds for medical care, you do not pay taxes when withdrawing the money either. This is a big tax advantage!

The 2025 maximum contribution amount is $4,300 ($8,550 if married). If you are age 55 or older, those numbers increase by $1,000. For more on write-offs, read my article HERE.

Example: your effective tax rate is 20%

Scenario 1: You pay $5,000 in medical bills from your checking account. You receive no tax benefits.

Scenario 2: You are eligible to open an HSA, so you open an account and contribute $5,000 to pay for an upcoming $5,000 medical bill. When you file taxes, you report that you contributed $5,000 to an HSA, so you write-off that amount, saving you [$5,000*20% =] $1,000 in federal taxes! Depending on the state you live in, you would also save money in state taxes. In Michigan, you would save an additional [$5,000*4.25%] $212.50 in state taxes.

Misconception

One misconception I hear is that you are required to have an HSA through an employer. THIS IS NOT TRUE. Some employers do contribute to an HSA on behalf of employees and offer employees the ability to contribute to that same HSA from each paycheck. However, you can open an HSA on your own through a bank or credit union and make contributions independently.

Many banks offer the ability to purchase mutual funds within the HSA. Depending on your situation, this can be a good way to grow your HSA even more to support future medical needs. And remember, you don’t pay any taxes on that growth.

There is a 10% IRS penalty and a requirement to pay taxes on any distributions that are used for non-medical expenses. Once you turn 65, though, that 10% penalty is waived, meaning it is treated similarly to a Traditional IRA if not used for medical expenses. The distributions are still tax-free if used for medical expenses.

In summary,  a Health Savings Account is extremely easy to establish. It’s a hassle-free way to save money at tax time. Every HSA provider I know will also provide an HSA debit card, and some even provide checks, making this a convenient and financially efficient way to pay for medical care.

*An HSA is not appropriate for everyone. Investing an HSA in mutual funds is not appropriate for everyone. Please talk with me about your specific situation. You are never charged for meetings or advice.