HSAs – The Good, the Bad & the Ugly

If you’re self-employed, part of the FIRE (Financial Independence, Retire Early) community, or just someone looking to retire early, you’ve probably heard of Health Savings Accounts (HSAs). Let’s xplore whether HSAs are worth it for you, including their advantages and potential drawbacks.

What is an HSA?

Let’s start with the basics. An HSA is a Health Savings Account, an interest-bearing account where the money you contribute is pre-tax. This lowers your taxable income, which can result in tax savings when you file your taxes. The IRS sets a maximum contribution limit each year, and for 2025, the contribution limits are $4,300 for an individual (someone enrolled in an individual health plan) and $8,550 for a family plan.

What makes HSAs particularly appealing is the triple tax advantage they offer:

1. Pre-tax contributions: Lower your taxable income.
2. Tax-free growth: The interest on your HSA balance is not taxed.
3. Tax-free withdrawals: If you use the funds for qualified medical expenses, there are no penalties or taxes.

How Does an HSA Affect Your Taxes?

HSAs can also impact your Modified Adjusted Gross Income (MAGI). If you get your health insurance through the marketplace (e.g., Healthcare.gov), your MAGI determines your eligibility for a premium tax credit. By contributing to your HSA, you could lower your MAGI enough to qualify for a larger premium tax credit, which could save you thousands of dollars each year.

In fact, the savings could be significant enough to offset your premium costs. For example, if you have an income of $80,000 for a family, you might receive a premium tax credit of about $1,114 per month, dramatically reducing your healthcare costs.

Using HSA Funds for Qualified Medical Expenses

Another major benefit of HSAs is that you can use the funds for a wide range of medical expenses. Qualified medical expenses aren’t limited to major procedures—they also include things like chiropractic care and over-the-counter medications. As long as you withdraw the funds for eligible medical expenses, you won’t face any taxes or penalties. The list of qualified expenses is extensive, making HSAs flexible for all sorts of healthcare needs.

Importantly, you won’t lose the funds in your HSA. Any unused money rolls over year after year, and the interest continues to accrue. If you wait until you’re 65, the HSA can even convert into a basic retirement account.

The Investment Potential of HSAs

One of the more attractive features of an HSA is its investment potential. Once your HSA balance reaches $1,000, you can begin investing the funds. The best part? Earnings from these investments are tax-free. For those interested in growing their wealth long-term, HSAs can function as an investment tool, in addition to being a health savings account.

But before we delve into that, it’s important to remember that HSAs must be used in conjunction with a High Deductible Health Plan (HDHP). We’ll discuss that in more detail shortly.

HSA vs. FSA: What’s the Difference?

You may have also heard about Flexible Spending Accounts (FSAs). While there are similarities between HSAs and FSAs, they are not interchangeable.

• HSA: The account is owned by you and stays with you, even if you change jobs or health plans. You can contribute to it as long as you’re enrolled in an HDHP. The contributions are tax-deductible, and you can invest your funds for future growth. There are no “use-it-or-lose-it” rules.
• FSA: This account is generally employer-based and is typically tied to your workplace health plan. Unlike an HSA, the funds in an FSA are not carried over from year to year, and any unspent funds typically expire.

The Drawbacks of HSAs

While HSAs have several advantages, they come with certain caveats. The most significant downside is that HSAs can only be used in conjunction with a high deductible health plan.

In 2025, the IRS mandates that to be eligible for an HSA, the minimum deductible for an individual health plan is $1,650, and $3,300 for a family plan. Often, the deductibles for these plans are set close to or at the out-of-pocket maximums, which can make them less appealing for those with extensive medical needs.

Additionally, HDHPs with HSAs often come with higher monthly premiums compared to other health plans. This makes it important to weigh the pros and cons carefully, particularly if you have significant medical needs.

Investment Potential: A Long-Term Strategy

For those who are looking to use an HSA as an investment vehicle, the long-term benefits can be substantial. Let’s say you contribute the maximum amount for a year or two while enrolled in an HDHP. If you invest the funds and leave them to grow, you might see significant returns over time. For instance, if you contribute $8,500 to your HSA at age 35 and leave it untouched, by the time you’re 70, it could grow to around $244,700, assuming an average rate of return.

This makes HSAs not just a way to save for healthcare costs but also a potential retirement investment tool.

Is an HSA Worth It?

So, should you enroll in an HSA? It depends on your situation. If you are healthy, don’t anticipate needing extensive medical care, and want to take advantage of the triple tax benefits and investment potential, an HSA could be an excellent option.

However, if you expect significant healthcare expenses in the near future, a high deductible health plan with an HSA may not be the best fit for you. In these cases, the high monthly premiums and out-of-pocket expenses may outweigh the benefits of contributing to an HSA.

For those with employer-sponsored HDHPs offering an HSA, this could be a low-risk way to take advantage of the account without the financial burden of purchasing an HSA plan through the marketplace.

Conclusion

HSAs offer great tax advantages and investment opportunities, but they are best suited for those who are healthy, don’t anticipate major medical expenses, and want to use the account for long-term savings. If you’re self-employed or part of the FIRE community, they can be an effective tool for saving and investing for healthcare costs in retirement.

However, carefully consider whether a high deductible health plan with an HSA is the right choice for you. If you’re unsure or have questions, it’s always best to consult with a financial professional or a licensed health insurance broker who can help guide you through the process.