Many Birchwood clients can attest that healthcare costs during retirement are one of the most significant expenses in a family’s budget. Planning for these expenses is critical to ensuring you have “enough” to live on during your retirement years. One of the best ways to plan and save for future healthcare-related expenses is to contribute to a Health Savings Account (HSA), ideally during your early working years.
If you have a longer time horizon and are comfortable investing the assets in your HSA, there is an even higher probability you will have more money available in the HSA by the time you retire.
To be eligible to contribute to a Health Savings Account, you must be covered by a high-deductible health insurance plan. In 2025, high-deductible plans have a minimum deductible of $1,650 (single) or $3,300 (family).
If eligible, the maximum contribution to a Health Savings Account in 2025 is $4,300 (single) or $8,550 (family). In addition, anyone over age 55 can make an additional $1,000 catch-up contribution to their HSA. If you and your spouse both have access to your own HSA accounts and are over age 55, you can make the additional $1,000 catch-up contributions. For a family in this situation, that means annual contributions of up to $10,550!
Health Savings Accounts differ from other long-term investment accounts and retirement plans because they offer “TRIPLE TAX-FREE BENEFITS.” If eligible, you can begin taking advantage of these key benefits associated with an HSA now.
When you contribute to a Health Savings Account, you’re doing so on a pre-tax basis, which means you avoid paying income tax on the contribution during the tax year in which it was made. In 2025 you could potentially avoid paying income tax on a maximum contribution of $4,300 for a single plan or $8,550 for a family plan (possibly more under each scenario if eligible for the age 55+ catch-up contribution).
Regardless of age, you can take tax-free distributions from your HSA for qualified medical expenses. Of particular importance is the fact that the expenses do not have to occur in the year you take the distribution. For example, you could contribute to your HSA for five years and during the 5th year, you can reimburse yourself for a qualified expense during year one. It’s essential to keep receipts for all your medical expenses to justify and account for the distribution.
Once you turn 65, you can take money out of your HSA without fear of penalty, regardless of why the distribution is being taken. You will still be subject to ordinary income tax on the distribution, but the 20% penalty is waived if you are older than 65. Another way of thinking about the age 65 rule is that the HSA can effectively function as a “bonus 401k plan”.
Suppose you take a distribution from your Health Savings Account before age 65 for a non-covered medical expense. In that case, the distribution will be subject to ordinary income tax and a 20% early withdrawal penalty. This is why it is so important to keep all medical receipts to justify the distribution as being covered/qualified.
As we transition to the second quarter of 2025, consider looking at your Health Savings Account to ensure you’ve been making contributions (if eligible). If your cash flow situation is strong, we encourage you to contribute the maximum amount to your HSA for the 2025 tax year. If you still have a sizeable shortfall before hitting the max and your cash flow is tight, there’s good news — you have until the 2025 tax filing deadline to fund your H.S.A. fully.
Contributions to a Health Savings Account can be made until the tax filing deadline (generally April 15th of the following calendar year). Importantly, contributions do not have to be made strictly out of payroll deductions. If you realize early in the new year that you didn’t fully fund your HSA for the prior tax year, you can contribute directly to your HSA (by check, ACH or money transfer) and claim the deduction on your prior-year tax return.