Health savings accounts (HSAs) provide a way to save money before it's been taxed to pay for qualified medical expenses. So you may wonder whether it’s worth enrolling in a high-deductible health plan (HDHP), which is required to contribute to an HSA. (You can open an HSA through your employer or a financial institution that offers it to individuals, as long as you meet all other eligibility requirements.) Because HSAs have a triple tax advantage, and your employer might contribute to your account, you might decide the answer is yes. Here’s more about HSAs’ tax benefits and other considerations.
Are HSA contributions tax-deductible?
Yes, HSA contributions are tax-deductible. How you contribute to your HSA determines when you receive a tax benefit.
- Pre-tax contributions: As with 401(k)s or 403(b)s, if your employer automatically deducts HSA contributions from your paychecks, those dollars aren’t taxed upon contribution. That means you can’t claim those contributions as additional deductions on your tax return, as you already received the tax break.
- Self-funded contributions: If you make contributions on your own with post-tax dollars, these contributions are deductible on your tax return.
Note that there are HSA contribution limits.
For 2024, the IRS contribution limits for HSAs are $4,150 for individual coverage and $8,300 for family coverage. The 2025 limits are $4,300 for individual coverage and $8,550 for family coverage. Any employer contributions will count toward these limits.
If you're 55 or older during the tax year, you may be able to make a catch-up contribution, up to $1,000 per year. Your spouse, if age 55 or older, could also make a catch-up contribution, but will need to open their own HSA. See IRS Publication 969 for more on annual HSA contribution limits.
What are the tax benefits of HSAs?
HSAs come with triple tax advantages.
1. Reduced taxable income
If you contribute to your HSA through automatic payroll deductions, those pre-tax dollars bring down your taxable income. Contributions you make yourself are tax-deductible, and you don’t need to itemize your deductions to claim it. In other words, you can reduce your income with HSA contributions throughout the year and further reduce your income by either taking the standard deduction or itemizing deductions at tax time.
A bonus: If your employer contributes to your HSA, those funds are excluded from your taxable income.
2. Tax-deferred growth
Money in your HSA could earn investment interest and grow on a tax-deferred basis. This means that you do not need to pay taxes on earnings while the assets remain in your HSA. You can even invest your HSA contributions in stocks, bonds, exchange-traded funds (ETFs), and/or mutual funds if your HSA custodian offers these options.
3. Tax-free withdrawals for qualified medical expenses
When you use the funds in your HSA to pay for qualified medical expenses, withdrawals are tax-free and can be made at any time without penalty. Once you reach age 65, you can use HSA dollars for anything you’d like without penalty, including expenses during retirement. Any withdrawals that aren’t used for qualified medical expenses in retirement will be taxed as ordinary income, like most withdrawals from traditional IRAs.
How to use your HSA to maximize tax benefits
To make the most of your HSA tax benefits, consider investing your contributions and only using withdrawals for qualified medical expenses. You also have the option to keep some or all of your HSA money in a conservative investment, similar to a savings account. While it’s possible for these dollars to earn interest, their potential for investment growth may vary.
To understand which health-related expenses qualify for tax-free HSA withdrawals, here’s a list of some common qualified medical expenses. Alternatively, you can use your HSA to pay your share of expenses, called coinsurance and copays, and HSA money can even be used to pay for your deductible.
Keep in mind you can't withdraw from your HSA to pay yourself for expenses your health plan covered.
Doctor visits
Your HSA funds can cover your office copays, specialist visits, and lab expenses like bloodwork and imaging (think: CT scans and MRIs).
Dental care
Cleanings, X-rays, and other dental work may be paid for using your HSA dollars.
Family-planning costs
Need birth control? Are fertility treatments in your family’s future? You can use your HSA to pay for those things, including a vasectomy.
Hospital costs
If you spend time in the hospital following an accident or surgery, you may be able to use your HSA to cover those expenses.
Over-the-counter medications
Cold, flu, pain, and other medications from your local drugstore can generally be paid for using your HSA.
Physical therapy
You can use your HSA to pay for physical therapy sessions.
Prescriptions
If you still have a copay for your prescriptions after your insurance pays their share, your HSA can cover the rest of the tab.
Travel for health care treatment
Whether it’s a rideshare to a doctor’s appointment or flight and hotel expenses for a visit to a faraway specialist, you can use your HSA to pay the bill.
Vision
Eye exams, new glasses, and contacts can be paid for using your HSA savings.
Other HSA benefits
Aside from the tax perks, HSAs have some lesser-known benefits.
Paying for old medical expenses
If you paid out-of-pocket for a medical expense while you had an HSA, you can reimburse yourself using funds from that HSA. There’s no deadline or time limit. The catch: If you paid the expense prior to opening your HSA, already claimed a tax deduction for that expense on a previous tax return, or reimbursed it from a Flexible Spending Account (FSA) or other tax-advantaged health account, you can’t reimburse yourself with HSA funds.
Be prepared to show receipts in case of an IRS audit. A best practice is to keep both paper and digital receipts for any medical expenses you might want reimbursed from your HSA. All requested reimbursements should be exactly the cost of the medical expense to the cent. If you’re enrolled in an employer-sponsored health plan through Fidelity or if you have a Fidelity Health Savings Account® (HSA), our Fidelity Health App can help you manage your health care expenses.
Supercharging your retirement savings
If you have access to an HSA, you could use it as a supplemental way to save for retirement. You could pay your qualified medical expenses out of pocket and let your HSA contributions potentially grow throughout your working years. This could add up by the time you stop working, especially if you start contributing while you’re young. You can also use your HSA to pay for nonqualified medical expenses in retirement. You just would have to pay federal and potentially state and local taxes on the withdrawals, but you wouldn’t have to pay any penalties. Here are 5 ways HSAs can help with your retirement.
Your HSA is always yours
Even if your employer sponsors the health plan that makes you eligible for an HSA, they don’t own your HSA. You do. That’s a big difference between an HSA vs. FSA. FSAs (flexible spending accounts) are owned by your employer. If you leave your job, you forfeit all funds in the account upon your departure, unless you enroll in the Consolidated Omnibus Budget Reconciliation Act (COBRA). When you change jobs, your HSA funds can travel with you. An HSA rollover may help you save on fees if your previous employer charges to maintain former employee HSAs.
