Roughly 1 in 5 Americans will benefit from a slightly more generous tax break come 2025.
Next year, anyone already setting aside money in a health savings account (HSA) will be able to contribute a little more than they could in 2024. That’s great news for anyone who already planned on contributing to one of these accounts as a way of optimizing their health care spending.
But it should also serve as a nudge for people who aren’t as aware of HSAs’ benefits to take a closer gander at this tax-smart tool, which among other things boasts a benefit commonly referred to as a “triple tax advantage.”
Today, we’re going to loop in a health care-finance expert to help us talk about HSAs. We’ll cover what an HSA is and what it does for those who don’t already know, then move on to how to use them strategically and what’s changing for 2025.
The Tea: Let’s start with the basics for those not in the know.
What Is an HSA?
A health savings account, or HSA, is a tax-advantaged account used to save for and pay qualified medical expenses.
That said, this isn’t just a stagnant account that merely holds your money—you can actually invest through an HSA, allowing you to grow your money much faster.
WealthUp Tip: Want to invest in an HSA? These Vanguard funds are a great starting point.
It’s a relatively new vehicle—they were created in late 2003 with the passage of the Medicare Prescription Drug, Improvement, and Modernization Act. But they’ve become pretty popular since then, with almost 72 million Americans covered by these accounts as of the end of 2022.
HSAs are a flexible tool, too.
What Does It Do?
You can use HSA funds to pay for qualified health care expenses for yourself, your spouse, any person claimed as a dependent on your return, or any person you could have claimed as a dependent except that either:
- The person filed a joint tax return.
- The person had gross income of $4,700 or more (for 2024).
- You, or your spouse if you’re filing a joint return, could be claimed as a dependent on someone else’s tax return.
However, if you use HSA funds for something other than a qualified medical expense, you’ll owe federal income tax on that money and might be hit with a 20% penalty by the Internal Revenue Service (IRS).
That is until you become disabled, die, or—most commonly—turn 65 years old.
At that point, you’ll no longer eat the penalty for withdrawing money to spend on unqualified expenses. So even if you didn’t plan on using an HSA because you don’t necessarily care about the health care-money aspect, you could instead use an HSA as another tax-advantaged account in your plan to save for retirement.
WealthUp Tip: Interested in using your HSA for retirement? Here’s how you can.
Also: Even though HSAs are often available through an employer-sponsored health insurance plan, you can keep an HSA if you change jobs or retire (i.e., it’s “portable”).
Who Can Contribute?
The account holder can make contributions to an HSA, but so can the account holder’s employer or family members.
Like most financial accounts, there are some rules to keep in mind. For instance, you can only contribute to an HSA (or have someone else contribute on your behalf) if all the following are true:
- You’re covered under a qualifying high-deductible health plan (HDHP) on the first day of the month
- You don’t have other health insurance coverage
- You aren’t enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return for the year
The Triple Tax Advantage
But the most noteworthy feature of the account is its multiple tax benefits.
WealthUp Tip: Fidelity retirement funds like these are another solid option for your HSA money.
“HSAs offer triple-tax benefits for Americans, allowing HSAs to become a powerful tool and can be implemented in the future of health care accessibility,” says Chris Labrecque, Chief Customer Officer of Paytient, a leading provider of health care affordability solutions and creator of health payment accounts (HPAs). These three tax benefits:
- Reducing taxable income: “The first tax benefit allows any contributions made to an HSA to be tax-deductible, or if made through payroll deductions, are pre-tax which can lower your overall taxable income. Ultimately, this means you can deduct the amount you contribute from your gross income when you file your taxes. This reduces your taxable income for the year and results in a lower tax bill overall.”
- Tax-free investment growth within the account: “The second tax benefit becomes relevant if any contributions to your HSA are invested in the market. Any interest or investment earnings on your account will not be taxed. This benefits the owner of the account, allowing them to grow their savings more efficiently over time.”
- Tax-free withdrawals for qualified medical expenses: “The third tax benefit of an HSA is that the dollars can be spent, tax-free, if used for qualified medical expenses. These expenses include a variety of health care costs such as doctor visits, prescription medicines, and certain medical procedures.”
The Take: Now, let’s move on to the HSA increase for 2025. To give you a better idea of not just what the new numbers are, but why they are what they are, we sat down to ask Paytient’s Labrecque a few questions:
WealthUp: How much more will people be able to contribute to HSAs in 2025?
Labrecque: For 2025, individuals with self-only coverage, the annual contribution limit will increase to $4,300, compared to $4,150 in 2024. Family coverage will increase to $8,550 for 2025, up from $8,300 for 2024.
WealthUp: How do the 2025 increases compare to the average annual increase of HSA contribution limits, as well as more recent increases?
Labrecque: Historically, HSA contribution limits have increased by about 1.5% to 2.5% annually. In recent years, the increase has been more significant due to factors such as inflation.
WealthUp: What does the 2025 HSA rule mean for employees?
Employees will benefit from the increase in the 2025 HSA contribution limit, as it allows them to save a few more tax-advantaged dollars. In addition to increasing their savings for medical expenses, higher HSA balances contribute to better retirement planning, increased financial flexibility, and the opportunity to earn compounding investment returns over time.
WealthUp: Why is the HSA set at the level it’s set at? Why is it not, say, $100, or $50,000?
Labrecque: The contribution limits are a balancing act to give families incentive to save for their future health care costs. It’s been good to see contribution limits growing at a steady pace in recent years given what’s been happening with inflation.
However, it’s true that many insured Americans have deductibles that are now higher than the annual HSA contribution limits. Ideally, someone can accrue a large HSA balance over a number of years as these dollars roll over year to year, but unfortunately, that’s out of reach financially for the average American enrolled in an HSA-compatible health plan, which they typically choose because it’s the least expensive option available.
WealthUp: Is there any benefit for employers?
Labrecque: Employers should consider solutions that make healthcare more accessible for their entire workforce, regardless of their ability to save to HSAs. An interest-free copay-over-time solution like health payment accounts can be a bridge that helps employees pay for care over time and protect growing HSA balances. This is key to a benefits strategy that not only prioritizes equitable access to physical care but also sets up employees for greater financial resilience over the long term.
WealthUp: Let’s say you were either an employer looking for a provider of HSAs, or an individual getting your own HSA on the open market. Why would someone choose one HSA provider over another?
Labrecque: An HSA provider should deliver a great employee experience for opening an account, and contributing savings, and the experience should be equally strong for your human resources team, who will be tasked with administering the program.
Flexible investment options are attractive features. And employers looking for an HSA administrator should require convenient and accessible customer support options by phone and chat.
And that’s all for this week! Thank you for reading, and remember: If you’re going to play College Football 25 all weekend, you’ll want to briefly stand up and stretch every 30 minutes or so. You’ll thank us later.
Riley & Kyle
WealthUp & Young and the Invested
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