A Comprehensive Review of Health Savings Accounts (HSA) – 2025-2026 Update

Last updated January 2026.

This annual update reflects the latest HSA and HDHP limits for 2025 and 2026, along with the planning traps we see most often.

When it comes to long-term, tax-smart saving, it’s hard to beat the triple-tax-free benefit provided by a Health Savings Account (HSA). Contributions can be tax-favored, growth can be tax-free, and withdrawals for qualified medical expenses can also be tax-free.

Quick Start: HSA Basics for 2025–2026

If you only read one section, read this.

Who is eligible

In general, you can contribute to an HSA if you:

• Are covered by an HSA-eligible high-deductible health plan (HDHP).
• Have no disqualifying additional health coverage (certain limited coverage is allowed).
• Are not enrolled in Medicare.
• Cannot be claimed as a dependent on someone else’s tax return.

2025 and 2026 contribution limits

• 2025: $4,300 (self-only), $8,550 (family).
• 2026: $4,400 (self-only), $8,750 (family).
• Catch-up (age 55+): +$1,000 per eligible person. Each spouse who is 55+ generally needs their own HSA to make a catch-up contribution.

Important: these limits are the total allowed for the year, including any employer contributions.

Best funding route: payroll deductions through a Section 125 cafeteria plan, when available, because they generally avoid FICA.

Spend now or invest for later

If cash flow allows, consider treating the HSA like a long-term savings account:

• Pay current medical costs out of pocket when possible.
• Invest the HSA for long-term growth.
• Save receipts so you can reimburse yourself later, tax-free

Even if cash flow is tight, it can still be worthwhile to contribute to and use the HSA for current expenses, since the contribution is tax-advantaged.

Top 3 traps to avoid

1. Medicare timing: Once you enroll in Medicare, you can no longer contribute to an HSA. Because Medicare Part A can be retroactive up to six months, stop HSA contributions at least six months before enrolling to avoid penalties.
2. Pro-ration and the “last-month rule”: Your annual contribution limit can be reduced if you are HSA-eligible for only part of the year. A special rule may let you contribute the full amount if you are eligible on December 1, but it comes with a required testing period.
3. Recordkeeping: To take tax-free withdrawals, keep clear records that distributions were used for qualified expenses and were not reimbursed or deducted elsewhere.

The most common way to save for retirement through your employer is a workplace retirement account, such as a 401(k) or a 403(b) plan. If you are self-employed, you can use a Keogh or a self-directed 401(k) plan instead. However, these conventional ways to save may not represent the best choices.

A quick reality check: HSAs are powerful, but they are not automatically the best first dollar for everyone. Cash flow, the quality and fees of the HSA provider, state tax treatment, and the value of employer retirement-plan matches can all change the order of priorities.

That said, for many households that are eligible and can afford to let the account grow, the HSA can be one of the most flexible, tax-smart tools available.

If you are employed and can achieve similar rates of return, you may be better off contributing to a Health Savings Account (HSA) before funding conventional retirement accounts. (Note that depending on the actual circumstances, if you receive an employer match to your contributions, you should take advantage of that benefit first.) Why do we like HSAs so much? They provide a triple-tax-free benefit! Read on to find out what that means.

The tax rules drive this thought process. Contributions to your HSA are tax-deductible. You don’t pay taxes on any growth in your HSA either. You can withdraw money from your HSA tax-free if you use the money to pay for qualified medical expenses. Importantly, medical expenses for this purpose generally include qualified expenses incurred any time after the plan was established. In other words, you save taxes three different times with an HSA. That means HSAs offer a triple tax-free benefit. While you can make tax-free contributions to your 401(k) plan or IRA, you pay ordinary income tax rates on withdrawals. Although you can withdraw money from your Roth IRA tax-free, you pay taxes on any deposits into your Roth IRA. As a result, both 401(k)s and Roth IRAs are only double-tax-free.Shorten with AI

2025 and 2026 HSA and HDHP Limits

	2025		2026
	Individual	Family	Individual	Family
Contribution Limit	$4,300	$8,550	$4,400	$8,750
HDHP Deductible	$1,650	$3,300	$1,700	$3,400
Out-of-pocket Maximum	$8,300	$16,600	$8,500	$17,000

The figures above reflect the IRS inflation adjustments for 2025 and 2026.

What’s new for 2025–2026

Federal law enacted in late 2025 expanded HSA planning opportunities in several ways, and the IRS has issued guidance explaining how these changes work in practice.

• Telehealth safe harbor made permanent: HDHPs can provide first-dollar telehealth coverage without disqualifying HSA eligibility. The permanent extension applies retroactively for plan years beginning after 12/31/2024.
• Bronze and catastrophic Exchange plans: For months beginning after 12/31/2025, certain bronze and catastrophic ACA Exchange plans are treated as HDHPs for HSA eligibility purposes.
• Direct Primary Care service arrangements: For months beginning after 12/31/2025, certain DPC arrangements can be treated in a way that does not disqualify HSA eligibility, subject to statutory limits and definitions.

If your coverage is in one of these categories, confirm how your specific plan is administered before assuming you are eligible. See IRS Notice 2026-5 for further information.

Some caveats

HSAs are powerful, but they are not automatically the best first dollar for everyone. The order of priorities can change based on cash flow, employer retirement plan match, HSA provider fees, investment options, and state tax treatment.

When you retire, you can withdraw money from your HSA to pay for qualified medical expenses. These withdrawals are tax-free. That means you don’t have to make a taxable withdrawal from your IRA or 401(k). This can also help keep you from being bumped into a higher tax bracket.

Key Points:

• Health Savings Accounts Are Different Than Flexible Spending Accounts (FSAs).
• Health Savings Accounts Provide a Triple-Tax-Free Benefit
• A family can contribute up to $8,550 in 2025 and $8,750 in 2026 annually to a Health Savings Account – more if at least one eligible individual is 55 or over.
• To get the optimal benefits from a Health Savings Account, you should invest the money for the future. You want to refrain from using it in the same year as you contribute money to the account.

What Is a Health Savings Account?

HSAs are tax-sheltered savings accounts available to those enrolled in high-deductible health plans (HDHPs). We will explain more about what an HDHP is later. For now, understand that an HDHP charges lower premiums than traditional insurance plans. It also comes with higher deductibles and out-of-pocket maximums. An HSA provides tax benefits to help defray these higher costs.

Contributing to a Health Savings Account Can Make Sense

Many overlook HSAs as retirement savings vehicles and instead use them to pay current medical bills. However, the accounts, which became effective as of January 1, 2004, come with more tax advantages than 401(k)s and individual retirement accounts. This applies if you use the funds to cover medical costs – whether now or in retirement. Even better, they can generate tax-free income.

Medical costs can represent a major retirement expense. According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring in 2024 and expecting to live to their life expectancy will need approximately $330,000 (in today’s dollars, net of taxes) to cover medical expenses throughout retirement. That estimate applies only to retirees with traditional Medicare insurance coverage. It does not include costs associated with nursing home care. Fidelity’s estimate of retiree healthcare costs helps justify why HSAs matter.

Health Savings Account: The Triple-Tax-Free Benefit

Health Savings Accounts offer a triple-tax-free benefit, making them one of the tax code’s most tax-favored savings vehicles:

1. Assets contributed to an HSA can grow tax-free.
2. Savers can contribute to them on a pre-tax or tax-deductible basis.
3. Account holders can withdraw the assets tax-free. This applies if the money goes toward (or is offset by) qualified medical expenses.

Given the triple-tax-free benefits, some financial planners – including Apprise – argue that, if you have the financial wherewithal to do so, you should leave your HSA undisturbed. Instead, use after-tax, non-HSA dollars to cover healthcare costs as incurred. This strategy lets you take full advantage of your HSA’s tax-saving features. You can utilize less tax-efficient, taxable assets instead.

An Example of the Savings and Benefits Provided by Health Savings Accounts

Assume you are single, and your taxable income is $100,000. In 2025, your marginal federal income tax rate – the rate you pay on your last dollar of income – is 22%. If you live in Baltimore County, Maryland, where Apprise Wealth Management is based, your marginal tax rate for state and local taxes is 7.95%. If you contribute through payroll deductions, you will also pay FICA tax (which finances Social Security and Medicare) at a rate of 7.65%. (Please note that you can only avoid paying FICA when you make contributions via payroll through a cafeteria plan because they are excluded from wages for employment tax purposes.) The result: of the next dollar you earn, you only get to keep about $0.62. Please note that this example is hypothetical and rates can change.Shorten with AI

If you put money in your HSA, you can avoid paying taxes on 100% of every dollar you save in your HSA if you use the money to reimburse qualified medical expenses.

Assume you save $3,000 in your HSA this year, and it grows at an annual inflation-adjusted rate of 4%. If that money stays in the account for 20 years, it will be worth $6,668. If you saved the same $3,000 in your 401(k), you would pay federal and state income taxes when you withdraw it in 20 years. Assuming the same federal and state rates as above, you would only have $4,671. Remember that this example only covers one year, too.

In other words, funds invested in an HSA can grow and produce higher returns than those available from other accounts. Why? You don’t pay taxes on the amount you put into your HSA. No taxes are due on the earnings realized from any deposits into your HSA. Plus, you don’t owe any taxes when you withdraw the funds, as long as you use them to pay for qualified medical expenses. That’s three times you could pay taxes on the money you deposit in your HSA. But you don’t pay taxes any of those times. You get a triple-tax-free benefit.

Even if you decide to use the HSA to pay current medical bills, it still makes sense to contribute. Why? The upfront tax deduction (roughly 38%) allows you to keep the money you would have otherwise had to pay in taxes.

Should an HSA be your next best dollar? HSAs can be one of the most tax-efficient accounts available, but the best move depends on your plan type, cash flow, the quality and fees of your HSA provider, state tax treatment, employer match opportunities, and Medicare timing. If you’d like help deciding what to prioritize in 2025–2026, let’s talk. Schedule a Free Intro Call

What Qualifies as a High-Deductible Health Care Plan in 2025-2026?

In 2025, a high-deductible health care plan (HDHP) has a minimum annual deductible of $1,650 for individuals and $3,300 for families. For 2026, the minimum annual deductible will increase to $1,700 for individuals and $3,400 for families. In 2025, the plan must have annual out-of-pocket expenses (deductibles, copayments, coinsurance, and other amounts but not premiums) totaling less than $8,300 for individuals and $16,600 for families. For 2026, the out-of-pocket expenses must be less than $8,500 for individuals and $17,000 for families. Note that these limits do not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. You only count deductibles and out-of-pocket costs for services within the network when considering whether the limit applies.Shorten with AI

Health Savings Account Contribution Limits for 2025 and 2026

In 2025, individuals in high-deductible healthcare plans can save up to $4,300 in their HSAs. Those with family plans could save up to $8,550. In 2026, the contribution limits will be $4,400 for individuals and $8,750 for families. You can contribute up to the limit regardless of your income. Your entire contribution is tax-deductible. You can contribute even when you have no income. Self-employed individuals can also contribute.

If you have an HSA and are 55 or older, you can make an annual extra “catch-up” contribution of $1,000. A spouse who is 55 or older can do the same, provided each of you has your own HSA account. Please note this important distinction. If you or your spouse have family healthcare benefits and both of you are 55 or over, the policyholder can only contribute $9,550 this year – the $8,550 family contribution plus $1,000 for being 55 or over. If the non-policy-holding spouse is also 55 or older and you want to maximize your total family contribution for the year, that spouse must have a separate account in their name and contribute $1,000 to that account.

Remember that if you and your spouse are both 55 or older, you must both have your own HSA to claim the full triple-tax-free benefit of $10,550 in 2025.

Fortunately, unlike the use-it-or-lose-it rules that apply to flexible spending accounts, contributions to HSAs can roll over to the following year. This means you can contribute the maximum amount without worrying about using the funds.

Please note: Account holders who exceed the contribution limit are subject to an annual 6% excise penalty tax on excess contributions unless they are withdrawn from the HSA before that year’s tax deadline.

HSA Eligibility Can Be Pro-Rated If You’re Eligible for Only Part of the Year

Your annual HSA contribution limit is generally based on the number of months you are HSA-eligible during the year. If you start (or lose) HDHP coverage mid-year, your contribution limit may be reduced. This catches many people by surprise, especially after a job change, a mid-year switch in health plans, marriage or divorce, or enrolling in Medicare.

The “Last-Month Rule” Can Allow a Full-Year Contribution

There is an exception called the last-month rule. If you are HSA-eligible on December 1, you may be allowed to contribute as if you were eligible for the entire year, even if you became eligible later in the year.

The Catch: The Testing Period

If you use the last-month rule, you must remain HSA-eligible during a testing period that generally runs from December 1 through December 31 of the following year. If you fail to remain eligible during that period—For example, if you switch to a non-HDHP plan, add disqualifying coverage, or enroll in Medicare—then the extra amount you contributed under the last-month rule can become taxable, and it may also be subject to an additional penalty.

Practical takeaway

If you become HSA-eligible late in the year, the last-month rule can be valuable. But only if you’re confident you’ll remain HSA-eligible through the testing period. When in doubt, it’s often safer to contribute based on the pro-rated monthly limit and avoid an unpleasant tax surprise later.

Example: How pro-ration and the last-month rule can change your limit

Assume you have self-only HDHP coverage starting July 1, 2026, and you remain HSA-eligible through year-end. Because you were eligible for 6 months (July through December), your 2026 HSA contribution limit would generally be 6/12 of the annual limit, or $2,200 (6 × $366.67, based on the $4,400 annual limit).

Now, assume you are also HSA-eligible on December 1, 2026, and you choose to use the last-month rule. In that case, you may be able to contribute the full $4,400 for 2026. The catch is the testing period; you must remain HSA-eligible from December 1, 2026, through December 31, 2027. If you lose eligibility during that period (other than because of death or disability), the extra amount you contributed only because of the last-month rule is added back to income in the year you lose eligibility, and it is generally subject to a 10% additional tax.

How Can You Use the Amounts in Your Health Savings Account?

1. You can withdraw money from the account to cover ongoing health expenses.
2. You can allow your HSA to grow over time by paying for ongoing health expenses with non-HSA funds.

Treating your HSA as an investment account instead of a short-term expense account allows you to invest the funds. They can then grow into another source of retirement funds or to cover medium- to long-term health care expenses. This approach also provides the greatest growth potential. That is why, to the extent possible, you should try to avoid spending these funds now. If you have an emergency or other very large medical expense, you can use your HSA funds.

Moving Balances from your HSA

HSA assets are portable. You can take this account with you when you change jobs, and you can move the money to a different custodian if you want better investment options or lower fees. There are three ways to transfer assets into an HSA:

1. Trustee-to-trustee transfer: One custodian sends the assets directly to another. You can do this as many times as you like.
2. 60-day rollover: You receive a distribution and redeposit it into another HSA within 60 days. This is generally limited to once per 12 months.
3. One-time IRA to HSA transfer: A once-in-a-lifetime transfer from an IRA, up to the annual HSA contribution limit. After this transfer, you generally must remain HSA-eligible for a testing period to avoid taxes and penalties.

Reimburse Yourself Later, Tax-Free

If you keep good records, you can reimburse yourself from your HSA years later for qualified medical expenses you paid out of pocket after your HSA was established. Once you reimburse yourself, the cash you receive is yours to use for any purpose.

You want to be careful about double-dipping. An expense can only be claimed once. Only non-reimbursed expenses apply as well.

You do not need to have current medical expenses; you merely need to have a receipt showing you paid the expense to get reimbursed. Qualified medical expenses can arise from any year (starting with the year the HSA is opened– not just the current one. This proactive strategy allows an HSA holder to supplement retirement income tax-free. It can also reduce your withdrawals from a taxable 401(k) plan account. This could also help keep tax rates lower, as additional taxable withdrawals from a 401(k) account can bump the holder into a higher tax bracket. It may also help you limit your Medicare premiums.

Contributions to your Health Savings Account Can Be Made After Year-End

There are other ways in which HSAs provide flexibility. Like with an IRA, taxpayers have until April 15th to make contributions for the previous tax year. For example, assume a married 58-year-old self-employed worker who participated in a family HDHP had $5,000 in medical expenses and wanted to pay for them with after-tax, out-of-pocket money. After meeting with her financial advisor, she learned she was eligible to contribute to an HSA.

As a result, before filing her tax return in April, she can establish an HSA and contribute $5,000. This would lower her federal and state income tax bills. She could even withdraw the $5,000 from her HSA and reimburse herself.

This approach is not as beneficial to a long-term financial plan as leaving the money in the account. But it still provides benefits.

Note that making a prior-year contribution requires you to take a simple but special action with your HSA custodian. When you make contributions, you must indicate specifically that they apply to the prior tax year. Why? A contribution made in, say, January, can be applied to either the current year or the prior year. When you make the contribution, there should be an indicator to your custodian of the tax year to which it applies. Make sure you select the correct one.

Maximizing HSA Tax Benefits, if You Have Adult Children Under Age 26

The IRS imposes specific requirements related to who can contribute to an HSA. First, the individual must be covered by an HDHP, have no other coverage, or be enrolled in Medicare. Second, nobody else can claim the individual as a dependent on their tax return. This allows for an unusual twist. The account owner does not need to be covered under their own healthcare plan.

This means a young adult (typically your child) who is covered under her parents’ HDHP plan (and who cannot be claimed as a dependent on her parents’ tax return) may potentially be eligible to contribute to her own HSA. It gets even better, though. Since your child is part of a family plan, she can also contribute up to the family limit.Shorten with AI

Remember that you can often cover your child under your healthcare plan through the age of 25. The additional cost may not be significant either. Consider this: You can cover your child under your healthcare plan, and she can contribute the family maximum to her own HSA. If you wish to implement this strategy, please confirm your dependent’s status and that no other coverage applies.

Please note that I have seen this used in other ways as well. I have an unmarried female client involved in a committed relationship. His old healthcare plan allowed him to cover her as well under a family plan. She was also allowed to contribute up to the family maximum amount to her own HSA. He has since changed jobs, and his new employer no longer allows him to cover my client under his healthcare plan. Thus, she can contribute only $4,300 to her HSA in 2025.

A Caution—Individual Deductibles within a Family Plan

When a family plan has separate deductibles for each covered individual and the entire family, each individual’s deductible must be higher than the minimum deductible for family coverage to be considered an HDHP.

Example 1: A family plan has an individual deductible of $2,100 and a family deductible of $4,200 in 2025. Because this family plan starts paying for non-preventive care before the family meets the minimum deductible of $3,300 for HDHP family coverage, this plan isn’t HSA-eligible.

Example 2: A family plan has an individual deductible of $4,000 and a family deductible of $8,000 for 2025. Because the individual deductible is higher than the $3,300 minimum deductible for HDHP family coverage, this family plan can be HSA-eligible if it also meets other qualifying criteria.

Out-of-Pocket Maximum Is Too High

Besides the minimum deductible, the out-of-pocket maximum of an HSA-eligible plan also can’t be higher than an inflation-adjusted number published by the IRS every year. If your plan has a high deductible and an out-of-pocket maximum higher than the IRS published number, it’s also not HSA-eligible.

***

If you want to contribute to an HSA, your insurance must make you take the first hits in non-preventive care. If you are healthy and you don’t consume much health care, it almost feels like you have no insurance. Every time you go to the doctor or fill a prescription, you are paying 100% out of your own pocket. You still benefit from in-network negotiated billing rates. That’s about it.

You just have to remember that insurance is supposed to cover unpredictable things that cost a lot but don’t happen often. You don’t use auto insurance when you get an oil change or when you have your brakes replaced. You don’t use homeowner’s insurance when you replace a worn-out weather strip. You must get used to your health insurance working the same way. I’ve been on an HDHP for several years. I’m still getting used to it. It’s not easy.

Other Advantages of Health Savings Accounts

Family Coverage:

HSA holders can use assets from their HSAs to pay for qualified medical expenses incurred by their spouse as well as dependents, even if they are not eligible to establish their own HSAs or even if their insurance coverage is different than that of the HSA holder.

Flexibility:

HSA holders can withdraw HSA assets or change them at any time, regardless of their current employer or current eligibility. In addition, there are no rules related to required minimum distributions. That means you do not have to start taking withdrawals at a certain age or withdraw a certain amount.

Full Vesting:

Whether made by the employee or the employer, contributions to an employee’s HSA vest immediately to the employee.

Long-Term Care Insurance:

You can also use HSA distributions to pay for Long-Term Care Insurance tax- and penalty-free (however, the amount is limited, see IRC 213(d)(10)).

Medicare/Retirement:

The Medicare Part B monthly premium (for doctor visits) gets deducted directly from a recipient’s monthly Social Security check. HSA holders can get reimbursed for those costs from HSA assets as well as Part D monthly premiums (for drug prescriptions).

No Use-It-Or-Lose-It-Rule:

Unlike amounts withheld for your flexible spending account, you need not spend amounts contributed to an HSA. Unused HSA funds remain the owner’s property.

Sources of Contributions:

The HSA owner, a family member, or an employer can make contributions.

Treatment at Death:

When an account holder dies, you can roll over the HSA to a spouse tax-free. That spouse can also continue saving and investing in the HSA. However, if you roll the HSA over to a non-spouse, the account’s balance is fully taxable (like what happens with a retirement plan account). As a result, HSA assets should not be held for the long term after the first spouse dies or if both spouses are in poor health.

If the beneficiary is anyone other than a spouse (or no beneficiary), the HSA stops being an HSA as of the date of death, and the beneficiary generally must include the fair market value (FMV) on the date of death in income.

• But that taxable amount is reduced by any qualified medical expenses of the decedent that were incurred before death and that the beneficiary pays within one year after the date of death.

You Must Keep Track of Out-of-Pocket Healthcare Costs

Strive to maximize the balance of your HSA and leave more money in the account for retirement. To do so, you must establish a system to keep track of the out-of-pocket money you spend on current medical expenses. Saving receipts allows you to file for reimbursement from your HSA at any time. Following this process helps you generate tax-free retirement income.

In the past, we often stored receipts in a shoebox or a filing cabinet. But it’s much easier today. If you have a scanner (you can also install a scanning app on your phone or tablet), you can use it to save receipts. Check with your HSA provider as well. Many providers offer electronic repositories for such receipts.

In general, your records must be sufficient to show that:

• You used the distributions exclusively to pay or reimburse qualified medical expenses;
• The qualified medical expenses had not been previously paid or reimbursed from another source; and
• You did not claim the medical expenses as an itemized deduction in any year.

You do not have to send these records with your tax return. Keep them with your tax records.

It is also important to ensure your heirs know where you keep the information. When spouses are named as beneficiaries, they can inherit HSAs tax-free. Other beneficiaries may have to pay income tax on the balance they receive following the account owner’s death. Importantly, you can also tap the account tax-free to pay the account owner’s unreimbursed qualified medical expenses within a year of death.

How Do You Report Your Health Savings Account Activity to the IRS?

You must file Form 8889 with your tax return if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. You must file Form 8889 even if only your employer or your spouse’s employer contributed to the HSA.

If, during the tax year, you are the beneficiary of two or more HSAs or you are a beneficiary of an HSA, and you have your own HSA, you must complete a separate Form 8889 for each HSA. You must also complete a controlling Form 8889, combining the amounts shown on each separate Form 8889. Attach the separate Forms 8889 to your tax return after the controlling Form 8889.

Investing Your HSA for Retirement

If you intend to save your HSA for retirement, you can invest it in a diversified portfolio just like for other retirement plan accounts. If you leave your contributions in a low-risk option like a money-market fund, the account’s growth will likely be minimal. Doing so will mitigate one of the HSA account’s biggest advantages – the ability to provide a triple-tax-free benefit.

Unhappy with your investment options? You can transfer your HSA to another financial institution that offers such accounts. You might also want to move your account to avoid high fees. For example, according to a recent Morningstar report highlighting the best HSA providers, the three most important criteria to consider are maintenance fees, interest rates, and additional fees. If you would like other options, check out HSAsearch.com. That database evaluates 853 different providers.

Unfortunately, few HSA participants invest assets held in their HSA accounts. The majority either save their HSA assets in a savings account or use their HSA on an ongoing basis to cover healthcare costs. Very few participants contribute the maximum allowable amount to their HSAs.

Are There Any Drawbacks or Limitations to Using Health Savings Accounts

There must be a downside to contributing to an HSA, especially because it relates to taxes. Here are some things to remember:

Limitations on Withdrawals.

To withdraw money tax-free, you must use it for qualified medical expenses. These can include medical costs, dental and vision care expenses, premiums for all types of Medicare plans except Medigap, and a portion of long-term care insurance premiums.

Use for Nonmedical Expenses.

If you use your HSA for nonmedical expenses, you will owe income tax on the distributions – plus a 20% penalty if you are younger than 65. (Note that the penalty for early withdrawals from an IRA is only 10% and only applies before age 59 ½.)

You Must Maintain Records/Receipts.

Whether you keep them in paper or electronic form, you must have support for any reimbursed expenses. But if you do, and you have been contributing for a long time, you can use the money for almost anything. You could buy a boat, take a special vacation, or do anything else you want to enjoy during your retirement.

HSA and Medicare: The 6-month Retroactive Trap

Beginning with the first month you enroll in Medicare, your contribution limit is zero. If you delay Medicare enrollment, make sure to stop contributing to your HSA at least six months before you plan to enroll in Medicare. If you do not follow this rule, you may incur a tax penalty.

When You Retire, You May Want to Spend Your HSA Funds Sooner Rather Than Later.

You can pass your HSA to your spouse if you die. He or she can then use it for qualified medical expenses. For non-spouse survivors, the account loses its HSA status, and its fair market value becomes taxable to the beneficiary. However, the beneficiary can use HSA funds to pay for the account holder’s medical expenses for up to 12 months after the account holder’s death.

If your HSA is transferred to someone other than your spouse at death, the value of account assets left in your HSA as of your death will be includible in your beneficiary’s gross income in the year that you died. Note that a non-spouse beneficiary (other than the deceased account holder’s estate) may lower the includible amount by the amount of any payments made from the HSA for qualified medical expenses incurred by you before you die. This only applies to payments made within one year of death.

Tax Treatment of Health Savings Accounts May Vary by State

The strategies described in this article are based on federal tax law. Most states follow federal tax law regarding HSAs. Two common exceptions are California and New Jersey, which generally do not treat federal benefits for HSA contributions and earnings the same way. If you live outside Maryland, confirm your state’s treatment before assuming you will receive the same state-level tax benefits.

Can I Use My HSA to Fund Insurance Premiums?

With some exceptions, insurance premiums related to the following types of insurance or events may be considered qualified medical expenses:

• Long-term care insurance: However, such amounts are subject to age-based limits and are adjusted annually.
• COBRA: Healthcare continuation coverage (such as coverage under COBRA).
• Unemployment: Healthcare coverage paid while you are receiving unemployment compensation under federal or state law.
• Medicare: If you are 65 or older, the cost of Medicare and other health care coverage (other than premiums for a Medicare supplemental policy, such as Medigap).

Many of the rules surrounding an HSA or a QHFD are complex, so we recommend consulting with a professional before acting and again when filing your return. If you want to do more research, you can review IRS Publication 969.

FAQs:

1) What makes an HSA “triple-tax-free”?

Contributions are pre-tax/tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free—even if you reimburse yourself years later for healthcare costs incurred after you opened the HSA (and not previously reimbursed or deducted).

2) Who’s eligible—and what counts as an HDHP in 2025-2026?

You must be covered by a high-deductible health plan (HDHP) with no disqualifying coverage (and not enrolled in Medicare).

• 2025 HDHP: min deductible $1,650 self / $3,300 family; max OOP $8,300 / $16,600
• 2026 HDHP: min deductible $1,700 self / $3,400 family; max OOP $8,500 / $17,000

3) How much can I contribute?

• 2025: $4,300 self / $8,550 family
• 2026: $4,400 self / $8,750 family
• Catch-up (55+): +$1,000 per eligible person. Each spouse 55+ generally needs their own HSA.
• Prior-year contributions allowed until Tax Day—tell your custodian which year the contribution applies to.
• Edge case: an adult child on your family HDHP who is not your tax dependent may open their own HSA and contribute up to the family limit, if they otherwise meet the eligibility rules.

4) Should I spend now or invest the HSA for later?

If cash flow allows, pay current bills out of pocket, scan/save receipts, and invest HSA funds for long-term, tax-free compounding. You can reimburse yourself later, tax-free, turning the HSA into a flexible retirement-health bucket.

5) What expenses qualify—including premiums?

Most medical, dental, and vision items, and many OTC items. You can pay the following premiums with HSA funds: Medicare Part B, Part D, Medicare Advantage, COBRA, coverage while unemployed, and age-limited long-term care premiums. Medigap premiums don’t qualify. Keep detailed receipts; you don’t file them with your return.

6) Medicare + HSAs: any timing traps?

Yes. Once you enroll in any part of Medicare, your contribution limit is $0. Because Part A can apply retroactively up to 6 months, stop HSA contributions at least 6 months before enrolling to avoid excess-contribution penalties. You can contribute to an HSA at any age as long as you are HSA-eligible and not enrolled in Medicare. Many people stop at 65 because Medicare enrollment begins then, but it’s the Medicare enrollment that ends eligibility, not the birthday.

The retroactive rule is most relevant if you continue coverage under a workplace plan past age 65. You can still use HSA dollars to pay Medicare premiums and other qualified expenses.

7) What if I use funds for non-medical items—or overcontribute?

• Non-medical withdrawals: Taxable plus a 20% penalty before age 65; taxable only after age 65.
• Excess contributions: Ask your custodian to return the excess plus earnings by the tax deadline to avoid the 6% excise
• Reporting: File Form 8889 for years with HSA contributions or distributions. Some states don’t fully follow federal HSA rules—check your state.

8) How do I move or invest an HSA wisely?

• Move/consolidate: Prefer trustee-to-trustee transfers (unlimited). 60-day rollovers are limited to once every 12 months. A one-time IRA→HSA transfer (up to the annual limit) is allowed. You must also maintain HSA eligibility for 12 months after such a transfer.
• Investing: After setting aside cash for near-term deductibles, invest the rest based on your risk/retirement horizon; avoid large idle cash balances in low-yield accounts if your goal is to cover long-term health costs.
• Beneficiaries: Name your spouse to preserve tax-favored status; non-spouse beneficiaries generally recognize the account’s value as income (they can use HSA funds within 12 months to pay the decedent’s unreimbursed qualified expenses).

Concluding Thoughts

If you have a high-deductible health care plan, you should open an HSA. HSAs can play an important role in your financial plan and improve your retirement readiness. Because they offer a triple tax-free benefit, HSAs provide greater tax benefits than other retirement savings vehicles.

If you have any questions about HSAs or believe something was not addressed above, please schedule a free call or Zoom virtual meeting by clicking this link. You can also complete our contact form, and we will be in touch.

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