HSAs cannot, however, be used to pay for the cost of insurance premiums, unless the individual is unemployed and collecting federal unemployment benefits. See IRS Publication 502 for more information about medical expenses covered by HSAs.
3 Potential Tax Benefits of HSAs
Arguably one of the most valuable features of an HSA are the tax advantages. This savings account potentially has “triple tax-free benefits,” meaning:
- The money you contribute can be tax-free as it goes into the account
- It can grow tax-free while it’s in the account
- It can be used to pay for qualified medical expenses, tax-free
Because of these potential tax-advantages of HSAs, some people may choose to hold money in an HSA and let the funds grow over time.
HSA Eligibility
To be eligible for an HSA, you:
- Must be covered by a High Deductible Health Plan (HDHP)
- Must not be covered by another health insurance plan (not applicable to specific injury insurance and accident, disability, dental care, vision care or long-term care)
- Must not be enrolled in Medicare
- Cannot be claimed as a dependent on someone else’s tax return
Because you must be enrolled in a HDHP to be eligible for an HSA, you can potentially reduce your monthly premiums, while additionally having the opportunity to save for medical expenses in an HSA.
It’s important to note that the 2023 contribution limit for HSAs is $3,850 for single account holders under age 55 ($7,750 for individuals with family coverage), but it is possible to save more in an HSA by investing in alternatives, like other self-directed retirement accounts.
For 2024, the contribution limits for HSAs increase. For individuals with self-only HDHP coverage, the limit is $4,150. For individuals with family HDHP coverage, the contribution limit is $8,300.
What is a self-directed HSA?
The funds in an HSA can be invested the same as you would invest your self-directed IRA funds. Returns on the investment are added to the account and accumulate tax-free.
These returns aren’t considered contributions and don’t count toward the contribution limits. As with IRAs, contributions to an HSA may be made until April 15 (or tax filing deadline) to obtain a deduction for the prior tax year.
You are able to invest in stocks, bonds, or mutual funds. However, other HSA owners invest in real estate or other alternatives to grow their HSA.
