The Power of HSAs: Your Ultimate Tax-Planning Tool During Open Enrollment

It's open enrollment, which plan do you choose? What you decide today, you are stuck with for a year until open enrollment comes along again...

This can be stressful, and weighing all your options can be overwhelming.

Here's one more factor that you may or may not be aware of and how it can play into your decision.

Will your plan qualify you to use a Health Savings Account (HSA)?

We are pro-HSA and a huge proponent of funding an HSA when you qualify. Not only can HSAs help cover health expenses, but they’re also one of our favorite tax-planning and wealth-building tools.

An HSA-eligible plan can bring significant long-term benefits if you meet certain deductible requirements, especially as you approach age 50 and start maximizing contributions.

Note that HSAs have very specific qualifying criteria, they don't apply to everyone.  

Here’s a breakdown of why HSAs deserve a spot in your tax strategy, how they work, and what maxing out contributions starting at 50 could mean for your retirement.

What Makes an HSA So Valuable?

An HSA is a tax-advantaged savings account that gives you control over healthcare spending while offering powerful tax benefits. In a nutshell, it’s like a triple-threat retirement tool for your health needs, allowing you to build a medical fund that’s as good as gold when you reach 65.

Key HSA Requirements:

• High-Deductible Health Plan (HDHP): To be HSA-eligible, your health plan must meet the IRS's high-deductible limits, which for 2024 are $1,600 for individuals or $3,200 for families and in 2025 is $1,650 for individuals and $3,300 for families.  
• No Other Coverage: You must have no additional health coverage that isn’t an HDHP, with limited exceptions.
• Age Limitations: While anyone over 18 and under Medicare eligibility can open and contribute to an HSA, those enrolled in Medicare can no longer contribute.

The Triple Tax and Wealth-Building Benefits of HSAs

This is where HSAs shine as a tax planning tool, as they offer:

1. Pre-Tax Contributions: Contributions reduce your taxable income in the year they’re made.
2. Tax-Free Growth: Any interest or investment gains within the account are tax-free.
3. Tax-Free Withdrawals for Medical Expenses: When funds are used for qualified medical expenses, they’re not subject to taxes.
4. Wealth building: You are the owner of your HSA account, it is your money in your account and rolls forward if not used.

These four perks allow you to create a solid buffer against medical expenses, giving you savings flexibility that rolls over each year.

Maxing Out HSA Contributions Starting at Age 50

When you hit 50, you get a valuable opportunity: the HSA catch-up contribution. The standard HSA contribution limit is $4,150 in 2024 and $4,300 in 2025 for individuals and $8,300 in 2024 and $8,550 in 2025 for families. However, starting at 55, you can contribute an additional $1,000 per year, which lets you build up a sizable fund by the time you turn 65. Here’s what this can look like with regular, maximum contributions:

1. Compounding Growth: Consistent contributions invested wisely can grow substantially in 10-15 years, allowing your HSA balance to snowball by the time you need the funds.
2. Tax-Free Healthcare Cushion: These funds are designed to be tapped for medical expenses, but if you don’t use them for health, they can function like a traditional IRA after age 65 (though withdrawals will be taxed if used for non-medical expenses).

Flexible Spending Account (FSA) vs. HSA

Many employers offer Flexible Spending Accounts (FSA) as part of their benefit package. FSAs are not HSAs even though both provide pre-tax money to pay for medical costs.

Here's how they differ...

FSAs have lower contribution limits and are a Use It or Lose It fund. The funds are returned to the employer if you do not use them. As such, you can't invest your FSA to earn more return on your investment.  

You do not own your FSA funds. There is no rollover or growth benefit to you.

FSA and HSAs can not be combined. If you choose an FSA, you can not also contribute to an HSA for that year.

Unlike FSAs, an HSA account is owned by you, it is your funds and in your control how it is invested. What you don't use, continues to grow over time and is part of your portfolio.

How HSAs Can Supercharge Your Tax Plan in Retirement

Using an HSA isn’t just about today’s tax savings—it’s also about creating future financial security. Here’s why it’s such a valuable tool:

• Medical Expenses Are Inevitable: Health needs often increase with age, so having tax-free funds set aside for these expenses can protect your other retirement savings.
• Extended Tax Benefits: An HSA’s tax-free growth is a rare benefit, making it an ideal place to store funds you might need for out-of-pocket health costs in retirement.
• Flexibility After 65: At age 65, you can withdraw HSA funds for non-medical expenses without penalty (although you’ll pay taxes on those), making it a versatile addition to your retirement strategy.

Open Enrollment Checklist: Should You Choose an HSA-Eligible Plan?

If an HSA sounds like a good fit, here’s what to consider during open enrollment:

• Confirm HDHP Status: If maximizing an HSA’s benefits is your goal, check if your plan meets the high-deductible threshold.
• Evaluate Your Health Needs and Risk Tolerance: An HDHP can be a good fit if you’re generally healthy and can handle higher out-of-pocket costs.
• Run the Numbers on Total Costs: Look at premiums, potential out-of-pocket maximums, and the long-term tax savings of an HSA to see if it adds up.

Summary

Choosing an HSA-eligible plan during open enrollment isn’t just about covering future medical bills. When used strategically, HSAs are one of the most tax-efficient ways to prepare for healthcare costs in retirement.

Starting catch-up contributions at age 50 lets you build a significant, tax-free fund that could provide peace of mind well beyond your working years.

So this open enrollment, consider adding an HSA plan to your toolkit. It’s more than just a health account—it’s an investment in a financially secure retirement.

This all said, HSA eligibility isn't the only factor to consider when you choose your plan.  But it should be a factor in your choice.