How Do Health Savings Accounts Work? A Guide for Seniors

To most people, a health savings account (HSA) is simply a savings account for medical expenses, such as doctor visits or prescription medications. But did you know it also comes with arguably the best tax advantages of any type of account? The “triple tax advantage” can add up to a huge win for your finances.

When you use an HSA, you can contribute tax-free dollars, grow your funds tax-free, and withdraw tax-free, for qualified medical expenses. In other words, contributions, capital gains, and withdrawals are all tax-free, when you follow the account’s rules.

An HSA is a great financial tool for seniors, not only for medical expenses, but also as a flexible retirement savings vehicle. So how do health savings accounts work? And what else do you need to know about them? Here’s a look at how HSA accounts work and how seniors can take advantage.

What Is a Health Savings Account?

A health savings account (HSA) is a savings and investment account designed to help you set aside money for future medical expenses. It offers special tax advantages, however, and you don’t have to wait for retirement for tax-free withdrawals.

Qualified contributions are not taxed, savings account interest and investment returns are tax-free, and withdrawals are also tax-free when used for qualified medical expenses, which may include doctor’s visits, prescriptions, dental care, vision treatments, and other qualified expenses.

How Do Health Savings Accounts Work?

Health savings accounts are only available to individuals and families enrolled in a high-deductible health plan (HDHP). With an HDHP, you will pay higher deductibles and out-of-pocket expenses before your insurance starts to help cover eligible expenses. Your HSA account can help cover out-of-pocket medical costs like deductibles, copays, prescriptions, and other qualifying expenses.

Contributions are limited by the IRS each year, and your employer’s contributions count towards your limit. An HSA can roll over the balance year-to-year and stays with you even if you change employers or retire. Families have a higher contribution limit than individuals.

Some accounts allow you to invest your HSA balance after it hits a certain threshold, which can help build your retirement savings over time. While you can’t contribute to your HSA after you enroll in Medicare, the funds you have saved are there to help pay for medical expenses in retirement.

Who Can Qualify for a Health Savings Account?

Not everyone can open or contribute to an HSA. The IRS has rules, and you must meet all of them:

• Covered by an HDHP: You need to have an HSA-eligible High-Deductible Health Plan. HDHPs come with high deductibles, and lower monthly premiums, than other traditional health insurance plans.
• No other disqualifying coverage: You cannot have additional primary health insurance. Rare exceptions exist, but in most cases, it only works if you have a single HDHP insurance policy.
• Not enrolled in Medicare: You can continue to use your HSA savings after enrolling in Medicare, but you cannot contribute to it any longer.
• Not claimed as a dependent: You cannot be claimed as a dependent on someone else’s tax return, even if you meet all the other requirements.

HSA Contribution Limits

The IRS caps the amount you can contribute to your HSA each year, and this maximum changes annually. Here’s how much you can contribute to your HSA in 2025:

• Self-only (individual) HDHP coverage: $4,300 maximum contribution
• Family HDHP coverage: $8,550 maximum contribution

For future years, you can always confirm the limit on the official IRS website.

Catch-Up Contributions

If you are 55 or older and not covered by Medicare, you can contribute an additional $1,000 in addition to the standard limit.

Pros and Cons of Health Savings Accounts

Like all financial products, HSAs have their advantages and disadvantages:

Pros

• Triple tax advantage: Contributions to an HSA are tax-deductible, your balance is allowed to grow tax-free, and when you withdraw the money for qualified medical expenses, you don’t pay taxes on withdrawals.
• Rollover benefits: Unlike Flexible Spending Accounts (FSAs), which have a “use it or lose it” arrangement, HSAs have no such restrictions. Your funds never expire. Like a regular bank or investment account, the balance can grow from year to year.
• Flexibility: HSAs can cover a wide range of medical expenses, including doctor visits, prescriptions, dental and vision care, and more. Starting at age 65, the funds can even be used for non-medical expenses without penalty (regular income taxes would apply for non-medical withdrawals).
• Portability: The HSA is yours to keep, even if you change jobs, change insurance carriers, or retire.
• Investment opportunity: Many HSAs offer the option to invest the account balance, potentially offering significant investment gains compared to savings account interest rates.

Cons

• Must be enrolled in a high-deductible plan: HSA holders are required to be covered by a high-deductible health plan (HDHP). While this might mean lower premiums for you, it also means you pay more out of pocket before your health insurance starts to cover medical bills.
• Limited annual contributions: The total you can contribute annually is restricted, which can be a challenge if you have high medical expenses and run out of HSA funds.
• Must not be enrolled in Medicare: Once you sign up for Medicare, you can’t contribute to your HSA anymore.
• Must keep records: You are responsible for maintaining receipts and records for all of your eligible medical expenses in case the IRS audits you. You can use a tool like HSATracker.org to manage receipts and reimbursements.
• Up-front expenses may be a strain: Seniors experiencing financial hardship may find it a stretch to pay a hefty deductible up front while also contributing to their HSA.

How to Open a Health Savings Account

The process of opening an HSA account involves only a few straightforward steps:

1. Confirm eligibility: Ensure that you are currently enrolled in an HSA-qualified high-deductible health plan (HDHP). You can’t contribute to an HSA without an HDHP.

2. Select a provider: HSAs can be opened with most banks, credit unions, insurance companies, and investment firms. Be sure to compare fees, account features, and investment options before making your selection. For employer contributions, you may be required to use an employer-specified provider.

3. Fill out an application: Personal information, proof of HDHP coverage, and a valid government-issued ID will be required. Most HSA providers also allow you to apply online.

4. Fund your account: Link your checking account to allow for direct transfers. Most providers also offer direct deposit as an option.

5. Make an initial contribution: Make your first contribution by payroll deduction, bank transfer, or personal check. You can contribute up to the annual IRS limit. Contributions made by your employer count toward this limit as well.

6. Start using your HSA: HSAs typically provide a debit card, and may also offer paper checks. Both of these can be used to pay for qualified medical expenses directly, or you can reimburse yourself from an HSA if you pay with another credit card or account.

Conclusion

Health Savings Accounts are more than just an option for paying medical bills. They are a tool for planning, saving, and preparing for the future. Their tax advantages, rollover capabilities, and flexibility make them a smart way to help offset the costs of healthcare well into the future.