Dollar for dollar, contributing to a health savings account, is quite possibly the single best tax move most individual investors can make.
That’s because they offer a combination of tax benefits that’s unmatched by any other savings or investment vehicle in the tax code:
- Pretax contributions
- Tax deferral of assets within the account
- Tax-free withdrawals if you use them to pay qualified health expenses
- Access to your HSA balance for any reason once you turn 65 with no penalties
This article describes how HSAs can help save you money on taxes on both the federal and state level (in Colorado, specifically).
We’ll also discuss the benefits of having your own private reserve of tax-advantaged funds that allows you to pay cash for healthcare expenses, rather than relying entirely on an insurance company.
Let’s take a look at each of these benefits in turn:
Contributions are Pre-tax
HSA contributions lower your taxable income, since you make them with pre-tax dollars. This means you pay less federal income tax. The more you contribute, the more you save.
For example, if you are in the 24 percent bracket, you would save $240 dollars in federal income taxes for every $1,000 you can contribute to your HSA. That’s a benefit you’ll realize in the first year, when you file your taxes.
Are you over 50? You can contribute an extra $1,000 in “catch-up” contributions. So can your spouse if your spouse is over 50 as well.
How Much Can You Contribute to an HSA?
As of 2024, the HSA contribution limit for individuals is $4,150 and $8,300 for families.
So for a family plan, you can contribute up to $8,300 for 2024, and save up to $1,992.
If both you and your spouse are over age 50 and you maximize your catch-up contributions for the year, you can save an additional $480, just in immediate income tax benefits in the first year.
If you’re in the 36% federal income tax bracket, you would save even more: up to $2790 in federal income taxes.
Next year, for 2025, the HSA limits are set to increase: to $4,300 for individuals and $8,550 for families.
Federal Payroll Tax Benefits of Contributing to an HSA
HSA contributions also reduce your self-employment tax.
This is because you make HSA contributions with pre-tax dollars, which lowers your taxable income. If you’re self-employed, you usually have to pay a self-employment tax of 15.3%.
However, HSA contributions lower this tax burden. For example, if you contribute the maximum amount to your HSA in 2024 and are in the 24% tax bracket, you’ll save $1,269.90 in self-employment or payroll taxes.
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Colorado HSA State Income Tax Savings
There’s also savings to be had at the state level, too.
In Colorado, the maximum state income tax bracket is 4.55%. If you contribute the maximum for a family plan as of 2024, your Colorado State Income Tax Savings would be as high as $627.20.
Benefits for Employers
If you’re an employer, you can also save money in payroll taxes by encouraging your employees to contribute money by salary deferral, rather than taking their salary or wages in cash and contributing to an HSA on their own.
Specifically, for every $1,000 in HSA contributions made by salary reduction, you stand to save up to 76.65%, reflecting the employer’s half of payroll taxes.
Is there an Income Cap?
HSAs don’t have an income cap on contribution eligibility.
Unlike IRAs, HSAs allow you to make a full contribution each year, regardless of your income.
Do You Have to Itemize?
No. HSA contributions are an above-the-line deduction.
This means you will get the full tax benefit of your pre-tax HSA contribution, whether or not you itemize your deductions. You don’t even have to file a Schedule A, unless you have other itemized deductions to claim.
Growth is Tax-Deferred
Money in an HSA grows tax-deferred. This means you don’t have to pay taxes on the interest earned.
This allows your HSA balance to grow faster. In essence, your HSA balance compounds over time, similar to how a 401(k) or IRA grows.
For instance, you have $100,000 invested in a taxable account and an HSA. Both investments earn 7% interest, and you’re in the 22% tax bracket.
After 20 years, the taxable investment would grow to $289,571, while the HSA would grow to $386,968. This is due to the tax-free compounding in the HSA. Even if you had to pay a 22% lump sum tax on the HSA withdrawal (which would only happen if the withdrawal was for non-medical expenses), the HSA investment still comes out ahead.
The Benefit of Tax Deferral
| Years of Compounding | Years of Compounding | Taxable Asset at 7% |
|---|---|---|
| 0 | $100,000.00 | $100,000.00 |
| 1 | $107,000.00 | $105,460.00 |
| 2 | $114,490.00 | $111,218.12 |
| 3 | $122,504.30 | $117,290.63 |
| 4 | $131,079.60 | $123,694.69 |
| 5 | $140,255.17 | $130,448.42 |
| 6 | $150,073.04 | $137,570.91 |
| 7 | $160,578.15 | $145,082.28 |
| 8 | $171,818.62 | $153,003.77 |
| 9 | $183,845.92 | $161,357.78 |
| 10 | $196,715.14 | $170,167.91 |
| 11 | $210,485.20 | $179,459.08 |
| 12 | $225,219.16 | $189,257.55 |
| 13 | $240,984.50 | $199,591.01 |
| 14 | $257,853.42 | $210,488.68 |
| 15 | $275,903.15 | $221,981.36 |
| 16 | $295,216.37 | $234,101.54 |
| 17 | $315,881.52 | $246,883.48 |
| 18 | $337,993.23 | $260,363.32 |
| 19 | $361,652.75 | $274,579.1 |
| 20 | $386,968.45 | $289,571.18 |
Withdrawals for Qualified Medical Expenses are Tax-Free
- You can use your HSA funds tax-free to pay for qualified medical expenses, including:
- Doctor visits
- Prescriptions
- Dental care
- Vision care
- Hospital stays
- And more
- See IRS Publication 502 for a complete list of qualified medical expenses:
Real-World Example:
- Imagine you need a hip replacement, which can cost around $32,000 without insurance.
- If you pay cash for this operation and are in the 24% tax bracket, you must earn around $42,105 pre-tax to cover the surgery.
- However, if you use your HSA, you only need to save the actual cost of $32,000—no tax implications involved.
- Your cost savings thanks to using your HSA $10,105.
Additional Benefits:
- HSAs offer flexibility. You can use your funds for qualified medical expenses anytime, even if you’re not retired.
- You can also use your HSA funds for non-qualified medical expenses after age 65, but you’ll pay taxes on the withdrawal. That’s not the end of the world: you’d have to pay the same taxes on an IRA or 401(k). However, unlike those two retirement plans, HSAs are not subject to required minimum distributions at ages 72 and up. As long as you don’t need the money for healthcare or anything else, you can let your HSA assets compound indefinitely, tax-deferred.
HSA: A Powerful Tool for Healthcare Savings
HSAs offer a unique combination of tax benefits and financial flexibility for healthcare expenses.
By contributing to an HSA, you can save money on taxes, grow your savings tax-free, and use your funds for qualified medical expenses.
Combining HSAs with Health Sharing Plans
It’s now possible to combine the tax advantages of an HSA with the powerful cost savings of a health sharing plan.
You can do this by adding HSA MEC. This is an inexpensive “limited value” plan that covers basic preventive care benefits. It also qualifies as a high-deductible health plan for the purposes of establishing eligibility to contribute to a Health Savings Account.
So you can contribute to an HSA even if you aren’t enrolled in a high-priced traditional health insurance policy.
This combination puts your cost savings into overdrive.
Learn more about how HSA MEC works.
HSAs Versus Itemizing Deductions
You can deduct medical and dental expenses on your tax return even if you don’t have a health savings account.
However, an HSA is a far better way to save money on healthcare costs.
This is because you can only deduct medical expenses if you itemize your deductions, which means giving up the standard deduction.
The standard deduction is a fixed amount that reduces your taxable income. In 2024, it’s $27,700 for married couples filing jointly and $13,850 for single filers. If your standard deduction is greater than the amount you would save by itemizing, it makes more sense to take the standard deduction.
This means you wouldn’t be able to deduct your medical expenses. But with an HSA, you can still save money on healthcare costs, regardless of whether you itemize your deductions.
That is, you can have your cake and eat it too! The HSA lets you take both the standard deduction and deduct the HSA contribution, on top of that.
Additionally, HSAs are not subject to the 7.5% of AGI threshold. Schedule A of your individual income tax return only lets you deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income. But with an HSA, you can deduct your contributions from the very first dollar.
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HSA Eligibility
To contribute to an HSA, you need to meet these criteria:
- You must be enrolled in HSA MEC or a qualified high-deductible health plan (HDHP).
- You cannot be enrolled in Medicare, the VA, or similar coverage.
- You can’t be claimed as a dependent on someone else’s tax return.
Start Saving Money
An HSA is more than just a way to pay for healthcare; it’s a powerful tool for building wealth and saving on taxes.
HSAs offer a triple tax advantage, with pre-tax contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. Don’t miss out on this valuable financial planning tool.
Contact a Personal Benefits Manager today to learn more and maximize your tax savings. They can also help you enroll in a qualifying high-deductible health plan, which allows you and your employer to make pre-tax contributions to an HSA.
Learn More: HSAs – An Underrated But Powerful Retirement Asset | Can I Use an HSA With a Health Sharing Plan in Colorado? | How to Get The Most Out Of Your HSA | What Are the HSA and HDHP limits for 2025?
Christine Corsini is a health insurance and medical cost sharing expert, and a Personal Benefits Manager at ColoHealth. Her goal is to help people embrace life’s amazing possibilities by staying healthy, saving money, and making the best decisions when it comes to healthcare.
