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Some Things You Didn’t Know About HSAs (and Some You Did)

You know what’s super cool? Health Savings Accounts (HSAs). HSAs are probably the coolest accounts out there - and no, an HSA didn’t pay me to say that.

Why are HSAs so cool? We’ll get into that, but first, there are some important bullets to get through about HSA contributions.

  • You must be insured by a High Deductible Health Plan (HDHP) to contribute to an HSA.

    • Below are the HDHP parameters for 2023 (these change annually).

      • Deductible of at least $1,500 for an individual ($3,000 for family coverage).

      • Out of Pocket Max of at most $7,500 for an individual ($15,000 for family coverage).

    • You also can’t have non-HDHP coverage in addition to your HDHP coverage.

  • You don’t need earned income to contribute (like you do to make IRA contributions).

  • You CANNOT be on Medicare and contribute to an HSA.

  • Non-qualified distributions prior to age 65 are taxed as ordinary income plus a 20% penalty.

  • The contribution limits for 2023 are below (these change annually).

    • Individual: $3,850

    • Family: $7,750

    • Individuals over age 55 may contribute an additional $1,000 annually.

    • Note: The contribution limit is prorated for the number of months you’re covered by an HDHP. If you’re only covered for 6 months, your contribution is half of what it otherwise would have been.

Alright, now that we got some of the basics out of the way, let’s get into the good stuff.

HSA Tax Benefits

HSAs are often touted as ‘triple tax advantaged’, but what does that mean? Take a look at the table below to compare to different types of accounts:


Roth Retirement

Pre-tax Retirement

Nonqualified or Taxable

Deduction for Contribution





Deferral of Growth





Tax-free Withdrawal





When you contribute to an HSA, you get a deduction for contributions (like a pre-tax retirement account), you don’t have to report income from the account on an annual basis (like any retirement account), and you don’t have to pay taxes on qualified withdrawals (like a Roth IRA). Now, in this case, qualified withdrawals are specifically for health expenses, but you can also treat HSAs like a regular pre-tax IRA after age 65 - withdrawals are penalty-free, but they are taxable.

Bonus tax savings alert! If you have an HSA through your employer, making contributions through your paycheck not only lowers the income you report on your tax return, it also decreases how much you pay in payroll taxes (7.65% for people earning less than the Social Security Wage Base). When you make contributions directly from your paycheck, it’s reported on your W2, so you don’t need to worry about making sure you add the contributions to your tax return. But it’s good to remember that you can also make contributions from your bank account. If you do this, make sure you tell your tax preparer how much, and remember: you can make prior year contributions up until the tax filing deadline (like IRAs).

Make Your HSA Work For You

The downside about plowing cash into your HSA through work is that they often don’t offer great interest rates. HOWEVER, you may be able to invest the balance of your HSA if it’s above a certain threshold (commonly $500 or $1,000). Now, it’s important to be prudent with your HSA investments - personally, I like to keep about the amount of our deductible in more conservative investments and invest the rest more aggressively. Tax-free growth is nothing to shake a stick at.

Unique Strategies for HSAs

  • One-time transfer from IRA

    • Once in your lifetime, you can make a qualified HSA funding distribution from your IRA. There’s no tax on the transfer, but it’s limited to the contribution limit for that year, less any other HSA contributions made. There are a lot of caveats to this strategy, so you should consult a professional if you think this is for you.

    • Example: John is 45, single, and covered by an HDHP. He has $150,000 in a pre-tax IRA. He recently had an expensive surgery and has a surprise bill of $10,000. He’s tight on cash and only has $7,000 in his HSA, so his only option is to withdraw from his IRA. Since he hasn’t made any other HSA contributions this year, his advisor helped him roll the full contribution limit of $3,850 from his IRA to his HSA. This helped John effectively avoid taxes as well as the 10% penalty for early withdrawal from his IRA that he otherwise would have likely faced.

  • HSAs for Adult Children

    • As many know, before age 26, you can still be covered by your parents’ health insurance plan. If you’re still on your parents’ insurance, but you aren’t claimed as a dependent on their tax return, you can fund an HSA as long as your parents’ coverage is an HDHP. This doesn’t affect their ability to fund their own HSAs.

    • Example: Jane is 23, single, and works at a diner. Since she doesn’t have access to health insurance through her employer, she’s covered by her parents’ HDHP. To save money on taxes, her advisor helped her fund $3,850 in an HSA

  • Fund it, but don’t use it (yet)

    • Great news - there isn’t a time limit on when to use your HSA dollars for medical expenses, and past expenses don’t expire. This means that you can reimburse yourself from your HSA for qualified expenses incurred years ago, allowing you to continue to build your HSA balance. Please note, many people don’t have the cashflow for this strategy

    • Example: John and Jane are married, covered by an HDHP, and they enjoy an income level that allows them to maximize their 401(k)s, backdoor Roth IRAs, and HSAs. Because they know the value of allowing their HSAs to grow, they have decided to pay all of their medical expenses out of pocket, and they’re diligent about documenting their HSA-qualified spending, so they can withdraw from their HSAs later if they need to.

Small Things to Keep in Mind

  • You should report your HSA distributions on your tax return.

    • You’ll get a 1099-SA for any HSA from which you made a distribution. Even if the distribution was for qualified medical expenses, you should report them on your taxes to limit the chance of an IRS audit.

  • You CANNOT contribute to both a Health FSA and an HSA.

    • This doesn’t mean that you can’t have a funded HSA and contribute to a Health FSA - you just can’t contribute to both in the same year.

  • HSAs are not great accounts to leave behind to non-spouses.

    • If you’re married and your spouse passes away, leaving you their HSA, you get to roll that right into your own HSA without paying any tax. However, if you inherit an HSA from your parent or another non-spouse, the HSA effectively ceases to exist, and you’ll owe tax on whatever the balance was when you inherited it.

    • Note that if you want to leave money to charity, adding your desired charity as a beneficiary on your HSA could be a great idea, since they won’t pay tax on the proceeds upon your passing.

At the end of the day, always remember this: HSAs are just another tool in your financial toolbelt. I’m a firm believer that there aren’t any ‘bad’ financial tools out there, just subprime implementation. Consider working with a professional - especially when things start to get complicated.


If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.

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