What You Need to Know About HSAs
Getting yourself into great financial shape isn’t confined to your asset allocation or developing smart saving and spending habits. It truly is about financial wellness. Like an annual physical, keeping up with your financial wellness should be an important part of your routine. If you are working, making sure you are taking the time maximizing your benefits through your current employer is a perfect example. Benefit election season is just around the corner. It might not be as exciting as some of the other holiday season traditions that are celebrated toward the end of the year, but it can have a greater impact either positively or negatively. This will be a discussion of Health Savings Accounts or HSAs for short. This often overlooked or under appreciated tool can play a significant role in reducing current taxable income, growing assets for retirement (tax free!) and building up a war-chest to help pay for health expenses are highest for most people. Let’s dive in.
So, what is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals save for medical expenses. It is typically used in conjunction with a high-deductible health plan (HDHP). Let’s explore how an HSA works and some key features.
Key Features of an HSA:
- Eligibility: To open an HSA, you must be enrolled in a high-deductible health plan (HDHP). You cannot be enrolled in other health coverage that is not a high-deductible plan, be enrolled in Medicare, or be claimed as a dependent on someone else’s tax return.
- Contributions: Contributions can be made by you, your employer, or anyone else on your behalf. Contributions are tax-deductible, which reduces your taxable income. There are annual contribution limits set by the IRS. For 2024, the limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for individuals aged 55 and older.
- Tax Advantages: Triple Tax Benefit: Contributions are tax-deductible, the money grows tax-free, and withdrawals are tax-free when used for qualified medical expenses. Qualified medical expenses include things like doctor visits, prescription medications, dental care, vision care, and more.
- Withdrawals: Withdrawals for qualified medical expenses are tax-free. Withdrawals for non-qualified expenses are subject to income tax and, if you’re under 65, a 20% penalty. Withdrawals can be made for any past medical expense; they do not need to be for expenses incurred in the current year unlike other goal specific accounts. For example, you could have your hip replaced this year, but withdraw the funds associated with that expense 10 years from now. Make sure to keep your documentation in case of an audit.
- Portability: The funds in an HSA rollover year to year, so you don’t lose the money if you don’t use it within the year. The account stays with you even if you change jobs or retire.
- Investment Options: Many HSA providers offer investment options for your funds, similar to a 401(k) or IRA, allowing your balance to grow over time.
- Long-Term Savings: HSAs can be used as a long-term savings tool. After age 65, you can withdraw funds for non-medical expenses without the 20% penalty (though you’ll still owe income tax on those withdrawals). HSA’s can also be used to cover certain Medicare expenses including premiums for Part B, Part C and Part D. It cannot be used to cover any Medigap policy premiums but can be used for Medicare Advantage Plan premiums.
How an HSA Works:
- Open an HSA: You must first be enrolled in a high-deductible health plan (HDHP).
- Fund the HSA: You, your employer, or someone else can make contributions up to the annual limit. There are catch up contributions for those 55 or over
- Use Funds: You can use the funds to pay for qualified medical expenses either by using a debit card linked to the HSA or by reimbursing yourself from the account after paying out of pocket. Key point, the funds can be withdrawn at any time, not necessarily the year in which you incurred that medical expense. For example, let’s say you had hip replacement surgery this year, you could still withdraw those funds ten years from now, allowing them to continue to grow in the account. Just make sure to keep your documentation in case of an audit.
- Save and Invest: Unused funds remain in the account and can be invested, allowing your savings to grow over time. You can use the funds in future years, and the funds remain in your account until you use them.
For those wondering where the strategy comes in, here it is: If you can pay your medical expenses out of your pocket vs. using the funds from your HSA, you can invest them and grow tax free. As with most things investment related, the earlier the better. That said, any tax-free growth is good tax-free growth! Let’s look at some math as an example of how an HSA can benefit you, even if you get a later start.
Scenario:
Jack & Jill – both age 45.
Jack’s employer offers a generous benefits package so most of the couple’s benefits are through his work. 80% of US employers have some sort of match for an HSA according to shrm.org, so we will assume that Jack’s employer contributes $700 annually to complement the $8,300 that Jack contributes.
$9,000 Annual contribution from Age 45 – 54
$9,000 Annual + $1,000 catch up contribution from age 55 – 67
If we assume that Jack and Jill invest their contributions and can pay any health-related costs out of pocket…
At an assumed 8% annual return, Jack and Jill can accumulate over $426,000 that if used for health-related expenses, can be distributed from their HSA plan tax-free. Jack’s contributions were tax deductible each year, the growth was tax free and now the proceeds are distributed tax free.
If you start earlier, the results can be even more dramatic. The HSA is a great savings vehicle that can make a meaningful difference in your financial wellness, retirement savings plan and should be considered a very powerful financial planning tool.
One important age-related rule that is worth pointing out: At age 66, you can use the funds in your Health Savings Account (HSA) for any purpose without incurring a penalty, but there’s an important distinction regarding taxes:
- For Qualified Medical Expenses: Withdrawals for qualified medical expenses are still tax-free, just like before. Qualified expenses include doctor visits, prescription medications, dental care, vision care, and other eligible medical costs.
- For Non-Qualified Expenses: Withdrawals for non-qualified expenses (anything not considered a qualified medical expense) will be subject to ordinary income tax but will not incur the 20% penalty that applies to those under age 65.
So, while you can use HSA funds for any purpose without a penalty after age 65, you’ll owe income tax on withdrawals used for non-medical expenses.
Please note that this article should not be construed as medical advice and pre-existing medical conditions and expenses should be considered when selecting what healthcare plan is right for you.

The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.
Breakwater Team
At Breakwater Capital, we work with families across the United States, providing each client with a personalized experience tailored to their current circumstances, future goals, and timelines.
