Why everyone under 40 should have a HSA
If you are under 40, healthy, and looking for a smart way to save money for the future, you may be overlooking one of the most powerful financial tools available: the Health Savings Account, or HSA.
An HSA allows you to set aside money today, watch it grow tax free, and use it later for medical costs, especially in retirement when healthcare expenses often rise sharply. For younger and healthier people, combining an HSA with a High Deductible Health Plan can be a very effective long-term strategy.
What is an HSA and why is it a great tool? A rare triple tax advantage.
A Health Savings Account is a special savings and investment account designed to help you pay for qualified medical expenses now and in the future. What makes it one of the most powerful financial tools available is its unique combination of benefits, starting with its triple tax advantage:
Tax-Deductible Contributions: The money you put into your HSA is either pre-tax (if made through payroll deductions) or can be deducted from your gross income when you file your taxes. This means every dollar you contribute lowers your taxable income for the year, giving you an immediate tax break.
Tax-Free Growth: Once your money is in the account, it's not just sitting there. You can invest it in stocks, bonds, or mutual funds, similar to a retirement account. All of the interest, dividends, and investment gains grow completely tax-free over time.
Tax-Free Withdrawals: When you use the money for qualified medical expenses, the withdrawals are 100% tax-free. You pay no taxes on the initial contribution, no taxes on the growth, and no taxes on the withdrawal.
Beyond the triple tax advantage, there are several other features that make the HSA a superior long-term savings vehicle, especially when compared to a Flexible Spending Account (FSA):
It's Your Account for Life: Unlike an FSA, which is typically tied to your employer and subject to a "use-it-or-lose-it" rule, the funds in an HSA belong to you. The account is completely portable, meaning you keep the money even if you change jobs or retire.
No "Use-It-or-Lose-It" Rule: Your HSA balance rolls over year after year, with no limit. This is a game-changer because it allows you to build a substantial nest egg for future expenses, rather than having to spend down your balance on minor items at the end of the year.
It Can Be a Retirement Fund: After you turn 65, your HSA becomes even more flexible. You can still make tax-free withdrawals for qualified medical expenses, including Medicare premiums. If you withdraw the money for non-medical expenses, it will be treated like a traditional IRA and taxed as regular income, but you won't pay a penalty.
A "Stealth IRA" for Medical Costs: This is the most powerful feature for younger people. By contributing to and investing the funds in your HSA during your healthy years, you are essentially building a tax-free retirement fund specifically for healthcare costs, which are often a major financial burden in your later years.
Requirements to Open an HSA
Not everyone is eligible to open an HSA. To qualify, you must meet all of the following:
Be covered by a qualifying High Deductible Health Plan (HDHP).
For 2025, this means a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage, and a maximum out-of-pocket limit of $8,300 for self-only or $16,600 for family coverage.
Not be enrolled in Medicare.
Not have other non-qualifying health coverage, such as a spouse’s plan that is not an HDHP.
Not be claimed as a dependent on someone else’s tax return.
For 2025, the maximum annual contribution is $4,300 for self-only coverage or $8,550 for family coverage. If you are age 55 or older, you can contribute an additional $1,000 as a catch-up contribution. Contributions can be made by you, your employer, or both, but together they cannot exceed these limits. Unlike a Flexible Spending Account, the money in your HSA carries over from year to year and remains yours even if you change jobs or retire.
A Simple Case Study: The Power of an HSA Over Time
To truly understand the long-term value of an HSA, let’s look at a concrete example.
Imagine a healthy family of four, both parents are 35 years old and have a combined household income of $250,000. They are enrolled in a High Deductible Health Plan and start contributing to an HSA for the first time. Their goal is to make consistent contributions for five years and then let the money grow until they retire at age 65.
Here's how the numbers could play out:
The First 5 Years: Contributions (Ages 35-39)
Contributions: The family decides to contribute $200 per month, which totals $12,000 over five years.
Tax Savings on Contributions: By making these contributions pre-tax, they save money on their taxes. Based on their income, this family could save an estimated $2,880 on their tax bill during these five years. This is like getting a bonus just for saving!
The Next 26 Years: Growth (Ages 40-65)
After five years, the family stops making contributions but leaves the $12,000 in their HSA to grow. They choose to invest their HSA funds, and over the next 26 years, the power of compounding takes over.
Total Nest Egg at age 65: That initial $12,000 balance blossoms into an estimated $69,688 by compounding at conservative 7% per year.
The Third Advantage: Tax-Free Withdrawals
When the family reaches retirement age and begins to incur higher healthcare costs, they have a tax-free nest egg ready to go. They can withdraw the entire $69,688 to pay for qualified medical expenses, such as Medicare premiums, dental and vision care, and prescriptions. Unlike a traditional 401(k) or IRA, these withdrawals for medical expenses are completely tax-free.
The Bottom Line
By contributing just $12,000 over five years, this family:
Saved $2,880 on their taxes right away.
Grew their savings to an estimated $69,688.
Created a fully tax-free fund to cover a lifetime of medical expenses.
This simple case study demonstrates that for young, healthy people, an HSA is not just a place to hold money for deductibles; it's a powerful and tax-efficient vehicle to build a substantial retirement fund specifically for healthcare costs.
Your Next Step: Put This Strategy to Work
An HSA is a powerful tool, but it's just one part of a comprehensive strategy to maximize your tax advantages and build a secure financial future. To discuss your specific scenario and explore how an HSA can be integrated into your tax and financial planning, please reach out to info@bottalacpa.com.