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By Jeffrey Hunter
• Feb 27, 2024
Wealth Strategist
TD Wealth®

Growing old can really be expensive! A major reason is the rising cost of healthcare.

A tax-advantaged savings tool known as a Health Savings Account (HSA) can assist you with managing healthcare costs now and in retirement. The potential benefits offered by HSAs may be substantial under the right circumstances.


To save money in an HSA, you must first be enrolled in a high-deductible health insurance plan (HDHP). These HSA-eligible health plans must meet or exceed certain deductible limits set by the IRS each year. For 2024, a HDHP must have a minimum annual deductible of $1,600 for self-only coverage or $3,200 for family coverage.

While HDHPs have higher deductibles than most HMOs or PPOs, they do come with an out-of-pocket maximum. That is the most that you will pay for any medical expenses before your insurance picks up 100% of the rest. The IRS also sets annual limits on your maximum out-of-pocket expenses for a HDHP to be considered HSA-compatible. For 2024, the annual out-of-pocket limit is $8,050 for an individual plan or $16,100 in you have family coverage.

Assuming you are already enrolled in a HDHP that is HSA-eligible, you still need to meet a few additional requirements before you can open or contribute to an HSA. In this regard, you must also:

  • Not be covered by any other health insurance plan that provides the same benefits
  • already covered by your HDHP.
  • Be 18 years of age or older.
  • Not be claimed as a dependent on someone else's tax return; and
  • Not be enrolled in any part of Medicare.

Tax Benefits

HSA contributions are either pre-tax (if made via payroll deductions) or tax deductible (if you make your own contributions). This not only saves you taxes in the year of the contribution, but it also reduces your adjusted gross income, potentially making you eligible for certain other tax perks like the ability to contribute to a Roth IRA. The higher your current marginal tax bracket, the more money you will save.

The next break relates to the growth of your account. All earnings and growth are 100% tax deferred, meaning that your funds will grow without being subject to taxes.

Finally, any withdrawals from your HSA are 100% tax-free if used to pay for qualifying medical expenses.

There's one additional tax break, but only if you make your contributions via payroll deductions through your employer. In that case, your contribution will not only escape income taxes, but your employer will also not deduct any payroll taxes from your contributions as well. This will save you another 6.2% in Social Security taxes and 1.45% in Medicare taxes on any amount that you contribute.

Finally, unlike other types of tax advantaged accounts such as Roth or traditional IRAs, there are no annual income limits for HSAs. You can contribute to an HSA regardless of whether your annual income is $100 or $1,000,000.

Contribution Limits

The IRS does place some limits on how much you can contribute to an HSA each year. For 2024, individuals with self-only coverage can save up to $4,150 and those with family coverage can save up to $8,300.

Once an HSA account owner reaches age 55, they can also contribute an additional $1,000/year to their account as a catch-up contribution.

One thing to be aware of is that the IRS treats married couples as a single tax unit. This means that both spouses share one combined family HSA contribution limit. So, even if each spouse has their own HDHP and HSA, they cannot save more than the amount of the HSA family coverage limit for that year in their combined accounts ($8,300 for 2024 plus any age 55 catch-up contributions).

Some employers also make annual contributions to the HSA accounts of their employees. If you're the lucky recipient of any such employer contributions, know that those contributions will also count towards your maximum contribution limits for the year.

Withdrawal Rules

As previously mentioned, you can receive a tax-free distribution from your HSA to pay for any qualifying medical expenses. This includes any medical expenses for you, your spouse, or any dependents that you claim on your tax return.

If you are under age 65 and you use your HSA funds to pay for anything other than a qualified medical expense, you will pay taxes on the withdrawal plus a 20% penalty.

However, after reaching age 65, you can take penalty-free distributions from your HSA for any reason whatsoever. However, to be both tax-free and penalty-free, the distribution must be for a qualified medical expense. Withdrawals made for any other purpose will be subject to income taxes but will avoid the 20% penalty that apply to withdrawals when you are under the age of 65. So, upon reaching age 65, your HSA functions similarly to a traditional IRA or 401(k) plan. The one exception being that any distributions from your HSA to pay for qualifying medical expenses will always be tax-free.

Qualified Medical Expenses

Qualified medical expenses include any expenses that would generally qualify for the medical and dental expenses deduction set forth in IRS Publication 502.

Here's a brief list of some of the more common HSA-eligible expenses:

Most health insurance premiums are not considered qualified medical expenses. However, there are a few notable exceptions:

  • Long-term care insurance (subject to limits based on age)
  • COBRA coverage
  • Health care coverage while you are receiving unemployment compensation
  • Certain Medicare expenses, including your Part B, Part D and Medicare Advantage plan premiums (but not supplemental "Medigap" premiums)

Death of Account Holder

Upon the death of an HSA account holder, any amount remaining in the HSA transfers to the beneficiary named on the HSA beneficiary designation form.

If your spouse is the beneficiary, your HSA will transfer to your spouse, and they now own the account. This provides them with all the benefits of account ownership, and they can continue making tax-free withdrawals from the HSA to pay for any of their current or future health care expenses.

You can also name your children or another non-spouse individual as a beneficiary. However, the tax benefits of the account will not transfer over to a non-spouse beneficiary. Instead, the balance in the account will be distributed to the beneficiary and the entire amount of the HSA will be included in the beneficiary's taxable income in the year of the original account owner's death (less the amount of any medical expenses incurred prior to the account owner's death that are paid from the HSA within one-year after their death).

Naming a charity as the beneficiary of your HSA is another option. In that case, the charity can receive the funds and avoid any income taxes.

Finally, if you do not name a beneficiary for your account, your estate becomes the beneficiary of your HSA. In that case, your HSA assets will pass to your estate and be included as taxable income on your final income tax return.

Your HSA and Investing

Another benefit of HSAs is that you can invest HSA funds that you are not using to cover eligible medical expenses.

By strategically saving your funds for retirement rather than spending them on your immediate healthcare expenses, you can maximize your HSA's potential for tax-free long-term growth.

Let's look at a hypothetical example. Imagine that you have a HDHP with family coverage and that you start saving and investing the maximum contribution to your HSA in 2024 ($8,300) and continue doing so each year until you retire in 25 years. Let's also assume that you can pay for any medical expenses incurred during your working years out-of-pocket so that your HSA contributions remain invested and grow at a 7% annual compound return. Finally, we'll assume a 2% annual increase in the maximum HSA contribution limit for years 2025 and beyond.

Based on these assumptions, here's how much you can potentially accumulate in your HAS by the time you retire.

The HSA funds can then be accessed tax-free in retirement to pay for any future qualified medical expenses and to reimburse you for any qualified medical expenses that you previously paid out-of-pocket. In addition, after reaching age 65, you can then access these funds on a taxable basis for any reason without a penalty just like a traditional IRA.

For more on personal finance topics

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We hope you found this helpful. This article represents the opinion of the author and is for general educational and informational purposes only and is based on information available as of February 2024 and is subject to change. Any references to third party programs and/or services are informational and may not apply in your specific circumstances. This content is not intended to provide financial, investment, legal, or tax advice or to indicate that a TD Bank, TD Bank affiliate, or third-party product or service is available or right for you.

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Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at 800-829-3676.

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