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The Strategic Power of Health Savings Accounts (HSAs)

Written By Brian McKinney, CFP® July 14, 2025

Unlocking the Full Potential of One of the Most Tax-Efficient Accounts

Planning for future medical expenses can feel like watching a storm build on the horizon, distant for now, but you know it’s coming, and it likely won’t be cheap. With the average couple expected to spend over $315,000 on healthcare in retirement, it’s no wonder many feel overwhelmed. But there’s a powerful tool in your financial toolkit that can help if you use it wisely: the Health Savings Account (HSA).

Think of an HSA like a Swiss Army knife for your healthcare and retirement planning; it’s got more tools than you might expect.

What Is an HSA?

An HSA is a tax-advantaged savings account available to individuals enrolled in a High Deductible Health Plan (HDHP). These health plans cover preventive care but require you to meet a higher deductible before they kick in for other services. Because of that, the IRS allows you to pair them with an HSA to help cover out-of-pocket costs.

In 2025, the annual contribution limits are:

  • $4,300 for Self-Only HDHP Coverage
  • $8,550 for Family HDHP Coverage

If you’re 55 or older, you’re eligible to contribute an extra $1,000 on top of the standard limit, regardless of whether you’re on self-only or family coverage. Both spouses can make their own $1,000 catch-up contribution, but each must have their own HSA.

The $4,300 (self-only) or $8,550 (family) includes contributions from you, your employer, or anyone else. You cannot exceed those totals. Unlike Flexible Spending Accounts (FSAs), your HSA funds don’t expire at year-end; they stay with you, even if you change jobs or retire.

Why HSAs Are So Powerful: The Triple Tax Advantage

Here’s where HSAs really shine. They come with a rare “triple tax benefit”, something no other account offers:

  1. Contributions are tax-deductible (or pre-tax if through payroll)
  2. Growth is tax-deferred (just like a 401(k) or IRA)
  3. Withdrawals are tax-free when used for qualified medical expenses

The Long Game: Why You Shouldn’t Spend It (Yet)

Most people use their HSA like a checking account, contribute, spend, repeat. But here’s a smarter approach: pay out-of-pocket for current medical expenses and let your HSA grow.

Why? Because if you invest your HSA balance, it has the chance to grow for decades, tax-free. One of the most overlooked features of an HSA is the ability to reimburse yourself tax-free for past medical expenses, even years later.

As long as the expense occurred after your HSA was opened, and you paid for it out of pocket, you can save your receipts and reimburse yourself whenever you want. Think of it like building a tax-free vault, you’re stacking receipts now and unlocking that value later when it fits best into your financial plan.

But there’s one catch: you can’t double dip. If you have already been reimbursed by insurance, or if you claimed that expense as a deduction on your tax return (such as by itemizing), it’s off-limits for HSA reimbursement.

The HSA in Retirement: Two Accounts in One

Once you turn 65, your HSA becomes even more flexible:

  • Use it for medical expenses? Still tax-free.
  • Use it for anything else? It works like a Traditional IRA, you’ll owe ordinary income tax, but no penalty.

That makes it a bit of a dual-purpose account: a health fund and a backup retirement account. It can also be used tax-free to pay for certain Medicare premiums (Part B, Part D, and Medicare Advantage), which are virtually guaranteed expenses in retirement.

Legacy Considerations: Plan Smart, Avoid Surprises

If your spouse inherits your HSA, they get to keep the tax benefits. But if a non-spouse (like a child or sibling) inherits it, the account becomes fully taxable to them in the year of your death. So, if you’ve built up a large HSA balance, make sure it’s part of your estate planning discussion.

Bottom Line: Don’t Sleep on the HSA

Most people overlook HSAs or treat them like glorified savings accounts. That’s a mistake.

Used strategically, an HSA can be one of the most tax-efficient and flexible tools in your entire financial plan. It’s not just for covering today’s co-pays, it’s a powerful way to prepare for tomorrow’s healthcare costs and supplement your retirement income.

If you’re unsure how to make the most of it, consider talking with a financial planner who can help you fit the HSA into your broader strategy. Because when used wisely, this account can do far more than cover a doctor’s bill, it can strengthen your entire retirement plan.

Williams Asset Management and Commonwealth Financial Network® do not provide legal or tax advice. This material has been provided for general informational purposes only and does not constitute either investment or tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a financial advisor or tax preparer.