Understanding Health Savings Account Contributions and Distributions

Health Savings Accounts (HSAs) are powerful financial tools that not only help individuals manage their health care expenses but also provide valuable tax benefits. As health care costs continue to rise, an HSA can be an essential part of your financial strategy for today and the future. To make the most out of your HSA, it is important to understand how contributions and distributions work.

What Is a Health Savings Account?

A Health Savings Account is a tax-advantaged account designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. Unlike traditional health insurance, which generally covers most health care costs, a HDHP requires you to pay more out-of-pocket before your insurance begins to cover expenses. The HSA helps cover these costs and offers unique benefits that can also contribute to your long-term financial goals.

HSA Contributions: How Much Can You Contribute?

The contribution limits for an HSA are indexed for inflation and are determined based on whether coverage is for the individual taxpayer or the taxpayer’s family. For 2024, the annual contribution limits are as follows:

• Self-only coverage: $4,150
• Family coverage: $8,300

For 2025, those annual contribution limits are as follows:

• Self-only coverage: $4,300
• Family coverage: $8,550

In addition to these standard contribution limits, if you are 55 or older, you can take advantage of a catch-up contribution, allowing you to contribute an extra $1,000 per year. This helps older individuals prepare for future medical expenses, as health care costs tend to increase with age.

How Do HSA Contributions Work?

Contributions to your HSA can be made in several ways:

• Payroll deductions: If your employer offers an HSA, they may allow you to contribute directly from your paycheck before taxes are taken out. This is often the most convenient way to fund your HSA, and because contributions are made pretax, it lowers your taxable income. This benefit may be available not only to W-2 employees but to partners in a partnership treated as self-employed individuals.
• Direct contributions: You can also make contributions directly to your HSA from your bank account. This can be done at any time during the year or until the due date of the individual’s tax return, excluding extensions, up to the annual limit.
• Employer contributions: Some employers contribute to their employees’ HSAs as a benefit, and these contributions are also tax-free. It is important to check with your employer to see if this is an option.

Tax Advantages of HSA Contributions

HSAs provide triple tax benefits, making them an attractive option for saving on medical costs:

• Pretax contributions: Contributions to your HSA are tax-deductible, reducing your taxable income in the year you make the contribution.
• Tax-free growth: The funds in your HSA grow tax-free, so any interest or investment earnings are not taxed if the money remains in the account.
• Tax-free withdrawals for qualified expenses: When you withdraw money from your HSA to pay for qualified medical expenses, those withdrawals are tax-free as well.

What Expenses Are Eligible for HSA Funds?

HSAs are designed for health care costs, and the IRS has specific guidelines about what qualifies as a medical expense. Some of the most common eligible expenses include:

• Doctor visits and hospital stays
• Prescription medications
• Dental and vision care
• Chiropractic care
• Mental health services
• HDHP deductibles and coinsurance
• COBRA
• Medicare premiums

The key here is that expenses must be for your medical care or the care of your spouse or dependents. The IRS provides a detailed list of qualified medical expenses in IRS Publication 502.

HSA Distributions: When and How Can You Use the Funds?

Once you have made contributions to your HSA, you can use the funds for eligible medical expenses at any time. You do not need to wait until you’ve reached a specific threshold, and you can use your HSA for expenses as soon as the money is in your account. Taxpayers should maintain receipts and other documentation to substantiate that expenses were incurred for qualified medical expenses. It is also important to note that you cannot take an additional deduction for the medical expenses paid from an HSA on Schedule A of your tax return.

Tax-Free Withdrawals for Medical Expenses

The most advantageous use of HSA funds is for tax-free withdrawals. If the money is used for qualified medical expenses, you will not owe any taxes on the distribution. This allows you to make the most of the tax-free growth and withdrawals, effectively making your HSA a tool for reducing your health care costs.

Nonmedical Distributions and Penalties

If you withdraw funds from your HSA for nonmedical expenses before the age of 65, you will face both income taxes and a 20% penalty. However, after age 65, you can take nonmedical distributions from your HSA without the 20% penalty (though the distribution will still be taxed as ordinary income).

Using Your HSA as a Retirement Savings Tool

Many people overlook the long-term potential of an HSA. If you do not need to use the funds for current medical expenses, you can allow the balance to grow over time, investing it for future needs. After age 65, you can use your HSA for any purpose without the 20% penalty, making it function much like a traditional retirement account. This provides an additional layer of flexibility in your retirement planning.

HSA Rollovers: What Happens if You Do Not Use Your Funds?

Unlike Flexible Spending Accounts (FSAs), which require you to use your funds by the end of the year or forfeit them, HSAs allow you to roll over your balance year after year. This means the money in your HSA can continue to grow and be used for future medical expenses without the worry of losing it. You can even invest your HSA funds, further increasing the potential for growth.

Maximizing Your HSA: Tips for Success:

• Contribute the maximum amount: If possible, aim to contribute the maximum allowed to your HSA each year to take full advantage of the tax benefits.
• Invest wisely: Many HSA providers offer investment options once your balance reaches a certain threshold. If you can invest your HSA funds, consider doing so to grow your account for future needs.
• Save receipts: Even if you do not use your HSA funds right away, keep receipts for qualified medical expenses. You can reimburse yourself later, allowing your HSA balance to grow in the meantime.

Your HSA in Action

Health Savings Accounts are one of the most tax-efficient ways to save for health care expenses. By understanding how contributions and distributions work, you can maximize the benefits of your HSA for both immediate and long-term health care needs. Whether you are saving for upcoming medical costs or using the account to build wealth for future health care and retirement needs, an HSA is a powerful tool that should be part of your financial strategy.

Take full advantage of this versatile account by contributing regularly, using funds for eligible medical expenses and planning for long-term growth. The right approach to your HSA can lead to both improved health and financial well-being. For more information on HSAs, please reach out to your Weaver tax advisor.

©2025