Here at Bold Vision Financial, we believe in turning life’s lemons into lemonade. One of the recent “lemons” has been the shift from traditional health plans to High-Deductible Healthcare Plans (HDHPs). But don’t worry, there’s a silver lining!
What are HDHPs?
HDHPs are healthcare plans with higher deductibles but lower monthly premiums. For 2025, the IRS defines an HDHP as a plan with a minimum annual deductible of $1,650 for individuals and $3,300 for families. The maximum out-of-pocket expenses are $8,300 for individuals and $16,600 for families.
Finding the Lemonade
For younger, healthier individuals, HDHPs can be a great choice because you’re not paying for care you don’t use (the money stays in your pocket instead of accruing to the insurance company). But the real magic lies in Health Savings Accounts (HSAs).
The Power of HSAs
HSAs offer a triple tax benefit: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. This can be even better than a Roth IRA!
Two Main Ways to Use HSAs
There are two primary strategies for using a Health Savings Account (HSA), and the best choice depends on your financial situation and goals.
- Immediate Use: The first is the more traditional route: use HSA funds to pay for current medical expenses, reducing the financial burden with tax-free dollars.
- Long-Term Investment: Invest your HSA balance for tax-free growth and reimburse yourself later for medical expenses, turning your HSA into a stealth retirement account. Meanwhile, you pay out-of-pocket for medical expenses out of other funds (ideally with a credit card that earns you points or rewards before you pay it off in full each month), save your receipts, and then reimburse yourself later — even years down the line — as long as the expense was incurred after the HSA was opened.
Whose expenses can you pay for with your HSA?
HSA funds can be used tax-free for eligible medical expenses for yourself, your spouse, and qualifying dependents or relatives under IRS rules. The person does not need to be covered under your HDHP or have health insurance at all to qualify for HSA reimbursement.
What are you allowed to pay for with an HSA?
For Health Savings Account (HSA) purposes, Qualified medical expenses are defined by the IRS and include a wide range of healthcare-related costs that are primarily used to diagnose, treat, or prevent physical or mental illness. Using your HSA for these expenses means the withdrawal is completely tax-free.
🩺 Common Qualified Medical Expenses Include:
- Doctor visits, specialist appointments, and urgent care
- Hospital services, surgeries, and lab work
- Prescription medications
- Dental care: cleanings, fillings, braces, root canals
- Vision care: eye exams, glasses, contacts, LASIK
- Mental health services: therapy, counseling, psychiatric care
- Chiropractic care and acupuncture
- Medical equipment: crutches, wheelchairs, CPAP machines
- Fertility treatments
- Prenatal and postnatal care, including childbirth
- Substance abuse treatment
- COVID-19 testing and treatment, flu shots, and vaccines
- Over-the-counter medications and menstrual products (added in 2020 under the CARES Act)
- Hearing aids and batteries
- Long-term care services and premiums
- COBRA premiums, Medicare premiums (after age 65), and certain health insurance premiums while unemployed
⚠️ Not Qualified (Generally):
- Cosmetic procedures (like Botox or teeth whitening)
- Gym memberships (unless prescribed for a specific medical condition)
- Vitamins and supplements (unless prescribed)
- Non-medical expenses (travel, food, childcare)
Are there other rules about HSA withdrawals?
If you’re under age 65, you can withdraw HSA funds tax-free and penalty-free only if the money is used for qualified medical expenses. These include things like doctor visits, prescriptions, dental care, and even certain over-the-counter medications and mental health services.
But if you withdraw funds for non-medical purposes, you’ll get hit with a 20% penalty plus the amount withdrawn will be taxed as ordinary income. So using it for, say, a vacation or a car repair before 65? That’ll cost you.
Once you turn 65, the rules loosen up:
- You can still use your HSA tax-free for medical expenses, just like before.
- But now, if you take money out for non-medical reasons, you’ll no longer face the 20% penalty — you’ll just pay income tax on the withdrawal (similar to a traditional IRA).
So after 65, your HSA essentially becomes a tax-deferred retirement account if not used for medical expenses, while still offering tax-free benefits if you do use it for health-related costs.
If you follow the “tactical tips” in the section below, you are less likely to need to pay taxes or penalties. Read on.
Tactical tips for using your HSA as an investment vehicle
At BVF, we are seeing more and more clients retiring with six-figure HSA accounts that they have faithfully invested for years. That’s great, and some of them are using those funds on new medical expenses like hearing aids and Medicare premiums, but if you achieve a lot of growth, you may find it is worth reimbursing yourself for previous expenses. Figuring that out years later can be a PITA. At BVF, we recommend that clients who plan to use their HSAs as investment vehicles create a folder on their computer or phone to save all receipts and use this online tracker we created to log all the expenses. Then, when you are ready to reimburse yourself, you can simply add the reimbursement entries to the sheet. Your future self will thank you for taking 30 seconds after each doctor’s visit or prescription order, which will save you hours of searching around later to ensure appropriate reimbursement amounts and documentation.
Who should consider using their HSA as an investment vehicle?
BVF generally recommends that clients consider using their HSA as an investment vehicle if they fit most or all of the following criteria:
- Are in reasonably good health such that choosing a HDHP is not an undue economic hardship (or stressor)
- Have maxed out the retirement options available to them (employer plans such as 401k, 403b, 457, relevant IRAs, etc.)
- Have high incomes (over the Roth IRA income threshold)
- Have cash flow and/or savings available to pay current medical expenses out-of-pocket
HSAs vs. FSAs
Some folks get confused between an HSA (Health Savings Account) and an FSA (Flexible Spending Account). While both are tax-advantaged tools designed to help cover out-of-pocket healthcare costs, they differ in a few important ways. First, HSAs are only available to individuals enrolled in a high-deductible health plan (HDHP), while an FSA can be offered alongside a broader range of health plans. HSAs are also individually owned, meaning the money stays with you even if you change jobs or retire, and any unused funds do roll over from year to year. In contrast, FSAs are typically employer-owned, and most operate on a “use-it-or-lose-it” basis, where unused funds are forfeited at the end of the plan year (though some employers offer limited grace periods or carryovers). HSAs also offer the ability to invest your balance for tax-free growth, and they have higher contribution limits compared to FSAs. Lastly, while both accounts offer tax-free withdrawals for qualified medical expenses, only HSAs give you the “triple tax benefit”: tax-deductible contributions, tax-free growth, and tax-free withdrawals — making them a powerful long-term savings tool.
Generally, you cannot contribute to both an HSA (Health Savings Account) and a traditional FSA (Flexible Spending Account) at the same time. That’s because the IRS considers them overlapping tax-advantaged accounts for the same types of medical expenses — and they don’t allow “double dipping.”
However, there’s a special type of FSA called a Limited Purpose FSA (LPFSA) that can be used alongside an HSA if your employer offers them. The key difference is that a Limited Purpose FSA is only for dental and vision expenses — not for general medical costs. Because it’s more narrowly focused, the IRS allows it to coexist with an HSA without violating the rules.
So if you’re enrolled in an HSA-eligible high-deductible health plan (HDHP) and want to maximize tax savings even further, using an LPFSA for things like cleanings, braces, glasses, or contacts can be a smart move if your employer has those. It lets you keep your HSA invested and untouched for broader or future medical needs, while using the LPFSA for short-term dental and vision costs.
Weird Quirk about Kids in their early 20s still on parents’ HDHP
If you have an HSA, you can keep your health care dependent(s) on your high-deductible health plan (HDHP) until they turn 26 years old. However, the IRS only allows you to use your own HSA funds to pay for qualified medical expenses for any dependents you claim on your tax return. This means that once your child turns 24, they may still be on your HDHP, but you can’t use your HSA for their medical expenses. (For a child to be a dependent for tax purposes, they must be under the age of 19 or under the age of 24 and a full-time student. There is also no age limit if the child is disabled).
So, here’s the weird quirk: once your child is no longer your tax dependent, they are eligible to open their own HSA, even if they are still enrolled in your HDHP. Since they are part of your family HDHP, they can contribute up to the family maximum. You can contribute to your child’s HSA on their behalf if you choose to. You should note, though, if you contribute to your child’s HSA, your child will receive the tax benefits for those contributions, not the parent.
If you are able to help your child grow their HSA, it could help your children be more prepared for medical emergencies when they are young adults, and help them be more comfortable enrolling in their own HDHP, knowing they won’t be starting their HSA from scratch.
Watch Out When Estate Planning
HSAs are great as long as the primary account holder or their spouse is alive. However, if the owner dies and the beneficiary is someone other than their surviving spouse, the HSA basically ends and the fair market value of the account assets gets included in the beneficiary’s gross income (or, if the beneficiary is the deceased account holder’s estate, this amount is includible in the decedent’s gross income for the year in which the death occurred). A non-spouse beneficiary can reduce the includible amount by paying for qualified medical expenses incurred by the deceased account holder before death, but only if the payments are made within one year after death.
Conclusion
If you are healthy and have an HDHP available, you can often make your money go further with strategic use of HSAs. If you have any questions or need personalized advice, feel free to reach out!