Quick Answers: How Does The Health Savings Account Work?
- You must have a qualified High Deductible Health Plan (HDHP) to open and contribute to an HSA (2025 min deductible $1,650/$3,300; max out-of-pocket $8,300/$16,600).
- HSAs give you a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
- Funds roll over year after year, and the account is portable (meaning you own it, not your employer).
- After age 65, you can use your HSA for any expense without penalty (but non-medical withdrawals are taxable as income).
Open enrollment can be confusing. You’re weighing premiums, thinking about “what-if” scenarios, and trying to find the best plan. The good news is, a Health Savings Account (HSA) can simplify this decision.
It gives you a triple tax advantage and is the only account that combines all three tax benefits. When paired with a High Deductible Health Plan (HDHP), it can lower your taxes today, grow tax-free for tomorrow, and be there for medical expenses whenever you need it.
Let’s walk through exactly how it works, and whether it’s right for you.
How does the Health Savings Account work?
An HSA is a personal savings account tied to your health coverage. But not everyone qualifies. To contribute to an HSA, you must:
- Be covered under a qualified HDHP (with IRS-set minimum deductibles and maximum out-of-pocket limits).
- Have no other disqualifying health coverage, like a traditional health plan or a general-purpose FSA.
- Not be enrolled in Medicare.
- Not claimed as someone else’s dependent on a tax return.
And unlike FSAs, which are “use it or lose it,” your HSA balance rolls over every year. There’s no expiration date. And because the account is in your name, not your employer’s, you keep it if you change jobs or retire.
Note: Once you enroll in Medicare, you must stop HSA contributions (and Part A can be retroactive up to 6 months—plan ahead).
What’s the benefit of the Health Savings Account?
We tax pros get excited about HSAs because contributions are tax-free. If you contribute through your Detroit employer’s payroll, the money comes out pre-tax. If you contribute on your own, you can deduct the amount on your tax return, which lowers your Adjusted Gross Income (AGI).
You have until the tax filing deadline (usually April 15th) to make contributions for the prior year (a longer window than 401(k)s). And if you’re 55 or older, you can contribute an extra $1,000 annually.
On top of that, growth is tax-free. Any interest or investment earnings inside the account are untaxed.
On top of THAT, withdrawals are tax-free, as long as you’re using the money for qualified medical expenses (think doctor visits, prescriptions, dental, vision). Before age 65, if you use HSA funds for non-medical expenses, you’ll pay a 20% penalty in addition to ordinary income tax.
How does the Health Savings Account work for YOU?
If you’re generally healthy, an HDHP + HSA is often a great choice. The lower premiums of an HDHP can free up cash to invest in your HSA, where it can grow tax-free.
But if you’ve got ongoing medical costs, we’d want to do a cash-flow analysis. If the HDHP’s out-of-pocket max is still manageable and the HSA tax savings offset some of your costs, it can still be a smart choice.
Also, think about your savings habits. If you can consistently max out your HSA contributions, you unlock the real benefit. Pay small expenses out of pocket, let the HSA grow, and even save receipts to reimburse yourself years later.
But if you use every HSA dollar as soon as it goes in, you still save on taxes… however, you miss the long-term compounding benefit.
HSAs can also be a great move for retirement planning. Because after 65, they’re like an extra IRA with no required distributions. They can cover Medicare premiums, long-term care costs, or just act as a flexible retirement cushion.
After 65, HSAs can pay Medicare Part B, Part D, and Medicare Advantage premiums tax-free (not Medigap), plus many out-of-pocket costs.
FAQs
“How much can I contribute to an HSA each year?”
The IRS sets annual limits. For 2025, the self-only contribution limit is $4,300 and the family limit is $8,550 (plus $1,000 if you’re 55+).
“Can I invest my HSA money?”
Yes, once your balance hits a certain threshold (set by your HSA provider), you can typically invest in mutual funds or ETFs. And your earnings grow tax-free.
“What counts as a qualified medical expense?”
Visits to your Detroit doctor, prescriptions, dental, vision, copays, deductibles, some medical equipment, and even Medicare premiums after age 65. The IRS has a full list here.
“Can I use HSA money for non-medical expenses before age 65?”
Yes, but you’ll pay regular income tax on it plus a 20% penalty. After 65, the penalty disappears, but non-medical withdrawals are still taxed as ordinary income.
“Can I have both an HSA and an FSA?”
Not usually. A general-purpose FSA disqualifies you. However, a “limited-purpose FSA” (covering just dental/vision) may be allowed alongside an HSA.
“Do I lose my HSA if I change jobs?”
No. The HSA is yours forever. It follows you even if you change employers or retire.
Why this matters
Here’s why this is a conversation we need to have now: For most Redford taxpayers, the Open Enrollment period (Nov 1 to Jan 15) is the only time you can make the switch to an HDHP. (Outside OEP, you generally need a Special Enrollment Period to switch.)
And, by this point, we know your income, your contributions, and where you stand for the year. That lets us calculate exactly how much you can still contribute to your HSA before filing time to lower your taxable income.
So, let’s schedule a time to look at your health plan and contribution strategy before Open Enrollment closes. This is your chance to maximize savings.
http://scheduling.seetax.net