Health Savings Accounts: 5 Things Worth Understanding
Takeaways:
- HSAs offer pre-tax contributions, tax-free growth, and tax-free withdrawals for medical expenses
- Contribution limits in 2026 allow families 55+ to approach nearly $10,000 per year
- Paying medical costs out of pocket can allow HSA balances to compound long term
- Health Savings Accounts withdrawals without medical claims can trigger taxes and penalties before age 65
- Health Savings Accounts can function similarly to IRAs once you reach retirement age
What are the five things?
Eligibility Requirements
Health Savings Accounts are only available to individuals enrolled in an HSA-eligible high deductible health plan, and certain coverage (FSAs, Tricare, Medicare) can disqualify participation.
Contribution Limits and Catch-Up Rules
Annual contribution limits to health savings accounts are modest but increase over time, with an additional catch-up contribution available for individuals age 55 and older.
Tax Treatment of Contributions, Growth, and Withdrawals
Contributions to health savings accounts are pre-tax, investment growth is tax-deferred, and qualified medical withdrawals are tax-free—often referred to as the “triple tax” feature.
Withdrawal Rules and Penalties
Non-medical withdrawals before age 65 trigger both ordinary income taxes and a 20% penalty; after 65, withdrawals without medical claims are taxable but penalty-free.
Long-Term Planning Use
Health Savings Accounts can be used as a long-term planning tool by paying medical expenses out of pocket, retaining receipts, and allowing the account to compound over time.
Health Savings Accounts: 5 Things Worth Understanding – Links
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Health Savings Accounts: 5 Things Worth Understanding – Transcript
I want to talk about health savings accounts.
These were signed into law in 2003 for the 2004 tax year by President George W. Bush. So they’ve been around for over 20 years.
The original limits were $2,600 for an individual participating in a health savings account.
And if you had family coverage, it was $5,150 that first year.
Now these numbers have nudged up… very slowly over the last 20 years.
In 2026, single members can contribute up to $4,400.
Someone covering a family can now contribute $8,750 to a health savings account.
If you’re 55 and over, you can add an extra thousand dollars to that amount you’re contributing.
So look, if you’re… if you’ve got family coverage. And you’re 55 or over, you’re getting close to $10,000 a year that you can put away in a health savings account.
I know these things start out very slowly.
But if you had been doing this as an individual, $2,600 a year… even if you just did that for the last 20 years now — without any kind of compounding — you’ve got $52,000 sitting in a health savings account.
These little accounts can really start to add up.
To be eligible for a health savings account, you need to be participating in a high deductible healthcare plan through your employer. Or, you need to be enrolled in what’s called an “HSA Eligible” plan if you have your own coverage.
Now look, healthcare plans in 2026 are plenty expensive!
But a health savings account — an HSA — might be worth considering.
You need to know the contributions go in on a pre-tax basis. The amounts in your plan compound without any kind of tax involved. And when you go to take your distributions, if they’re for medical expenses, that money is not going to be taxed.
So a lot of times you’ll get advisors who talk about this “triple tax free feature.”
This is actually a pretty decent plan now in 2026.
A lot more plans are becoming, a lot more, healthcare plans are becoming high deductible plans.
That’s not great.
A side benefit to that is more and more folks are becoming eligible now to enroll in a health savings account.
But it might just be cash flow that’s stopping someone from doing this.
You’ve got to pay a lot of money out of pocket. And then, you know, the premiums go up every year.
Then to think about putting money into a health savings account on top of that… that might be a tall order for some.
But let me give you some numbers:
As of 2025, there were 40 million participants in health savings accounts.
That is way more than I imagined when I started putting my numbers together for this video.
The total amount of money from those 40 million participants in health savings accounts adds up to $159 billion dollars.
That sounds like an awful lot of money that’s sitting in health savings accounts.
But if you do the math, the balance, on average, works out to be just a shade under $4,000 per account.
What’s going on here?
Well, I imagine some people are using this as expenses come up.
So you’ll see cash go in and then you’ll see cash coming out right away for healthcare expenses.
One way to consider approaching these health savings accounts is to make the contributions. But — pay your expenses as you go, (pay) out of pocket and try not to tap into the account.
Let the account just compound.
Save every single receipt that you get – where you paid something for medical care out of pocket. And, and save these for years. Here’s why. There’s no deadline on submitting claims.
Like, you know, if you have a flexible spending account, it’s “use it or lose it” in that calendar year.
You’ve got to have a healthcare expense and then submit the claim right away.
(But) With a health savings account, there is no deadline like that.
So suppose you’re approaching age 65 and you hit your max out of pocket when you were 59, 60, 61 years old. That’s three years. My max out of pocket right now is $7,000 per year.
If this were me.. and I had three years of max out of pocket…
That’s 21 grand I can withdraw at age 65 from my health savings account.
No tax.
If you make a withdrawal from a health savings account for a medical expense, there is no tax that gets associated with that.
But if you were to take money out of a health savings account — and you didn’t have a medical claim attached to that, you need to know there’s a 20% penalty, twenty percent penalty, on top of the withdrawal being taxable income to you.
Try not to do that.
You also need to know at age 65, you don’t necessarily need a medical claim to (or receipts) to take money out of a health savings account.
Just know it is going to be taxable income if you don’t have a medical claim attached to it.
It works a lot like an IRA.
Once you apply for Medicare, you’re no longer eligible to contribute in a health savings account.
Um… if you don’t apply for Medicare around age 65… I should probably do another video on that topic alone… there’s a lot of things that could go wrong.
But if you don’t apply for Medicare at age 65 and you’re still participating in a high deductible healthcare plan, you may still be eligible to put money into an HSA.
Now, if you’re covered by Tricare, if you’re in the military, you’re not eligible for an HSA. Because it’s not a high deductible healthcare plan.
Folks, by the way, in, if you’re in Tricare, you’re eligible for something that’s called a Healthcare Flexible Spending account. That might be something that you could take a look at… because you can put away up to $3,400 bucks into a plan like that.
Also, if you or your spouse participates in a flexible spending account at work, you may not be eligible for a health savings account.
A lot of moving parts, for such small accounts.
It doesn’t sound like much because the dollars seem small.
But, like Roth IRAs, like IRAs when they first began, like 529 plans, a lot of these plans start out with small dollar amounts.
But over time they, these plans get expanded. It’s something you really shouldn’t ignore.
And a health savings account, I think is something that may be worth a look.
Thank you for watching “Health Savings Accounts: 5 Things Worth Understanding”
