When it comes to retirement savings, there are many different accounts that offer tax benefits. But most only offer two of the three tax-preferential benefits. For instance, a Roth IRA allows invested money to grow tax deferred and be withdrawn tax-free but does not allow a tax deduction for contributions. On the other hand, a traditional 401(k) plan allows a tax deduction for contributions and grows tax deferred, but the money is taxed upon withdrawal. 

Health savings accounts (HSAs) are often referred to as triple tax advantaged because they allow for a tax deduction for contributions, tax-deferred growth, and tax-free withdrawals for qualified distributions.  

In this post, we’ll review who is eligible to contribute to an HSA and the requirements you need to meet to be able to take advantage of all three tax benefits. 


Who can contribute? 

There are four main requirements to be able to contribute to an HSA: 

  1. You must be covered by a high deductible health plan (HDHP) on the first day of the month. 
  2. You cannot be covered by any other health plan (note that disability, dental, vision, long-term care, and accident insurance do not apply here). 
  3. You cannot be enrolled in Medicare. 
  4. No one else can claim you as a dependent on their tax return. 


HSAs and Medicare

As mentioned above, you cannot contribute to an HSA if you are enrolled in Medicare.  

Be aware that when you file for Social Security, you will automatically be signed up for Medicare (after age 65), so factor in stopping your HSA contributions six months before you file. If you forget, this should be caught on your tax return, and you have until the due date (usually April 15 of the following year) to remove the excess contributions and earnings from your HSA.  

If you started collecting Social Security before age 65, you must stop your HSA contributions the month before you turn 65, as you will be automatically enrolled in Medicare at age 65. As an example, if you turn 65 in June, your last HSA contribution will be in May, and you can contribute a total of 5/12 of the annual limit. 


What is an HDHP? 

The IRS sets very specific criteria for health insurance plans to be considered high deductible. Below, we walk through the basic requirements, but when in doubt, ask your insurance carrier whether your plan is HSA eligible. Insurance companies tend to be very in tune with whether plans are eligible, given that it can be such a significant benefit. 

First, the plan must have a minimum deductible of $1,500 for 2023 (increasing to $1,600 for 2024) for individual coverage or $3,000 ($3,200 for 2024) for family coverage. Keep in mind that for family plans with different individual and family deductibles, both deductible amounts must meet these minimum requirements. 

The out-of-pocket maximum for the plan, which includes deductibles and copayments but not premiums, cannot exceed $7,500 ($8,050 for 2024) for individual coverage or $15,000 ($16,100 for 2024) for family coverage. 

Enrolling in an HDHP doesn’t necessarily mean that you will not receive any benefits until your deductible is met. The HDHP can cover some preventive care procedures without disqualifying it for HSA contribution purposes.  


How do HSAs work? 


HSA contributions are typically made through payroll deductions, similar to a 401(k). These deductions are not taxed, will not be included in earnings on your W-2, and do not phase out at any income level. 

When deducted directly from your paycheck, these contributions also avoid Social Security and Medicare taxes. You can contribute to an HSA on your own and still take advantage of a tax deduction, but you will miss out on these FICA tax savings (an additional 7.65% for most!). 

There are of course contribution limits to HSAs as a trade-off for the significant tax benefits. In 2023, you are limited to contributing $3,850 (increasing to $4,150 for 2024) for an individual or $7,750 ($8,300 for 2024) for a family.  

If you are 55 or older, you can make an additional $1,000 catch-up contribution. And if you and your spouse are both over 55, you can each make an additional $1,000 contribution. Be aware that HSAs are individually held accounts, so a spouse making a catch-up contribution would need to open their own account to do so. 

It’s important to understand that if your employer makes contributions on your behalf, those contributions count toward these limits. So you want to keep this in mind when deciding how much to have withheld from your paycheck each year. 


Excess contributions

If you overcontribute to your HSA in a given year, you may face a 6% excise tax for each year that the excess contribution remains in the account. 

To avoid this penalty, you’ll need to withdraw the amount contributed that was over the limit no later than your tax filing deadline, including extensions, for that year. 

For more details on correcting overcontributions to HSAs and other tax-advantaged accounts, take a look at this article. 


Tax-deferred growth 

After contributing to your HSA, you can start taking advantage of the tax-deferred growth. You can invest the money in your account according to your unique goals and time horizon. Any dividend, interest, or capital gains income that is generated within the account is not taxed in the year it is earned. And as you’ll see later, it may never be taxed depending on when you withdraw the funds and what you use them for.  

In order to maximize this tax-deferred growth, if you have the ability to fund your medical expenses with your current cash flow, you can leave the funds in your HSA untouched and invest them for long-term growth. You can even keep track of receipts for expenses you incur today and use them years in the future to pull money out of the account tax-free. 



If you withdraw money from your HSA and use it for qualified medical expenses, the withdrawal is made completely tax-free. This is the third piece of the triple tax advantage offered by HSAs. Qualified medical expenses include most typical health care costs as well as Medicare premiums and potentially a portion of long-term care insurance premiums. 

However, if you withdraw the money and do not use it for qualified medical expenses, the cost can be steep. You’ll owe taxes on the withdrawal at your current marginal tax rate and you’ll also be hit with a 20% penalty. 

For example, if you’re in the 24% tax bracket and withdraw $1,000 for a nonqualified expense, you would owe $240 of income taxes and be charged a penalty of $200. 


Distributions after age 65

As you can see from the extensive tax benefits, HSAs are best used for medical expenses. However, there is an additional opportunity to use funds for any purpose and still realize some of the tax advantages. 

At age 65, you can withdraw money from your account for any reason, without incurring the 20% penalty. You’ll still owe income taxes on distributions, unlike if the money were used for medical expenses. But this is a good option for those who have limited medical expenses in retirement and are not expecting to use all their HSA funds for that purpose. 


Inheriting an HSA 

One disadvantage of HSAs is the tax treatment upon the death of the account owner. An HSA can pass tax-free only to a spouse. If anyone else inherits the account, the entire balance is taxed to that person in the year of inheritance.  

So plan to spend your HSA on medical bills during your and your spouse’s lifetimes. This is of special importance to the LGBTQ+ community, where couples may not be married, and they need to understand that their HSA cannot be passed tax-free to their partner at death. The account will be fully taxed at death if it hasn’t been spent. 


Final thoughts 

The tax advantages offered by HSAs can have a significant positive impact on your long-term financial picture. Next time you are selecting a health plan, consider whether an HSA-eligible plan could be the right choice for you. And if you want help thinking through the right decision for you and your unique situation, please reach out to our team. 

Disclaimer/Author(s) Bio: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Milestone Financial Planning, LLC, (Milestone), a fee-only financial planning firm and registered investment advisor in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client’s interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.  Advisory services are only offered to clients or prospective clients where Milestone and its representatives are properly licensed or exempt from licensure.

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