Health Savings Accounts have become popular workplace perks with significant tax-efficient investment opportunities – but many Americans have no idea how they work.
About 26 million people had an HSA at the end of 2023, according to Devenir, a Minneapolis-based research and investment firm. Assets in these accounts reached approximately $137 billion last June and are expected to reach $175 billion by the end of 2026.
“We’re definitely seeing growth in the number of people signing up,” said Todd Katz, executive vice president of group benefits at MetLife. Strong market performance also spurred investment growth in HSA accounts, helping to grow balances.
Yet 50% of American adults don’t understand how the HSA works, according to a survey by Empowera financial services company. According to MetLife’s September 2024 U.S. Employee Benefit Trends Study, only 34% of employees with access to an HSA signed up for the benefit, and only 24% of those who did have registered and funded their accounts.
It can get expensive: HSA benefits are “truly unmatched compared to Roth IRAs or 401(k)s,” said Christine Benzdirector of personal finance and retirement planning at Morningstar. “We just don’t see such tax benefits.”
Here’s what you need to know about HSAs and how to benefit from them:
Tax Benefits of Health Savings Accounts
HSAs are tax-advantaged accounts for healthcare expenses. Funds ride on from year to year, and the account supports you if you change jobs. HSA money can also be invested.
To be eligible to contribute to a health savings account, a person must be enrolled in a high-deductible health plan, or HDHP. For 2025, the Internal Revenue Service defines this as any plan with an annual deductible of at least $1,650 for an individual or $3,300 for a family. The maximum out-of-pocket expenses for an HDHP are $8,300 for an individual or $16,600 for a family.
A savings, spending and investment account, HSAs offer three ways to save on taxes.
“You can put pre-tax dollars into your health savings account. As long as the money stays within the HSA limits, it’s not taxed,” said Benz, the author of “How to Retire.” . “And then, assuming you withdraw the funds and use them for qualified healthcare expenses, those funds aren’t taxed either. So you get a tax break every step of the way.”
In 2025, eligible individuals can contribute up to $4,300 to an HSA or $8,550 for family coverage.
“You need to do some math.”
High-deductible health plans may have lower monthly premiums than other plans, but it could still be difficult for many people to find the cash needed to meet the deductible on a hefty medical bill.
Experts say that getting the most out of an HSA’s tax benefits generally requires covering current healthcare costs out of pocket, if possible, so that the HSA’s investment funds can grow for future use. It’s not easy to do either.
Additionally, if you withdraw money from your HSA for non-medical expenses, you must pay federal income tax and a 20% tax penalty on the money withdrawn. Account holders aged 65 and over can avoid this penaltybut he will still pay income tax.
There’s a lot to think about, which is why experts recommend taking the time to weigh the pros and cons of the options.
A new report from Voya Financial finds that 91% of U.S. workers are choosing the same health plan as the year before. But experts say it can pay off make calculations.
“If you’re someone who has to go to the doctor all the time, you know you’re going to meet your deductible, you probably want to go with a co-pay plan, but you have to do some math,” said Carolyn McClanahanphysician and CFP based in Jacksonville, Florida. She is a member of CNBC Financial Advisors Council.
Benz agrees, adding that “successful use of the high-deductible plan relies largely on the use of this health savings account.”
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