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We all heard about using 401(k)s or IRAs for their potential tax advantages. 

But some people don’t really know much about Health Savings Accounts (HSA) and their tax benefits.

Why HSA?

HSA is generally considered to be one of the most tax efficient accounts, because:

• Contributions are tax deductible

• Earning inside can HSA grow tax-free

• Withdrawals are tax-free if used for qualified medical expenses

How can you qualify?

1. You need a high deductible health plan (HDHP)

If you don’t have one - you won’t qualify. 

Per IRS (as of 2025), a high deductible health plan is defined as a health plan with the following limits:

2. You aren’t enrolled in Medicare

3. You can’t be claimed as a dependent on someone else’s tax return

Contribution limits

For 2025, the contribution limit is $4,300 for an individual plan and $8,550 for a family plan, with an additional $1,000 catch-up contribution if you are 55 or older.

How does HSA actually work?

The account typically works like a bank account, where you make deposits and can withdraw funds for medical expenses via online transfers/checks or special provided debit cards.

There are 2 different ways to contribute to an HSA:

1. Employer deductions

Many employers (not all), offer an HSA account if you choose a employer sponsored HDHP. 

This is generally the best way to contribute to an HSA because the contributions are pre-tax (including FICA tax savings of 7.65%).

2. Contribute on your own

As long as you have an HDHP, you don’t need to follow your employer’s option and can open an HSA with any provider you choose. 

However, while you will be able to receive a deduction on your federal tax return, you will not benefit from the 7.65% FICA savings as opposed to the payroll option.

Withdrawals

Withdrawals for medical expenses are tax-free. IRS Publication 502 has information about which expenses qualify as medical expenses. For example, here are some expenses that qualify (as of March 2025):

• Vision (eye exam, eye glasses, eye surgery)

• Dental (cleanings, fluoride treatments, braces)

• Physical exam

• Abortion and birth control pills

You also don’t HAVE TO pay for your medical expenses via HSA right away. You can use after tax funds, or your credit card and reimburse yourself later for such expenses. Just make sure to save your receipts (e.g. photos in the cloud) to prove your expenses are qualified and legitimate in case of an audit.

There is currently no timeline within how long you need to reimburse yourself.

This is why some people invest their HSA and pay out-of-pocket; then in 10-20 years, you can “reimburse” yourself for all prior expenses by directly transferring from an HSA to your bank tax-free. In this case, an HSA could act like a “Silent IRA”.

Is it worth it?

Since HSA requires HDHP, you might ask “Is it really worth it, or should I just have a PPO or other plan?”

Here are some things you should think about:

1. How healthy are you?

We can’t really predict the answer to this one, but you know yourself best. There is a big difference between just getting annual check ups vs receiving a lot of treatments.

In such cases, you need to analyze the difference between deductible costs and tax savings (example to come)

2. How much of your monthly premium does your employer cover?

If your employer covers 100% of your cost, as many tech companies do, it might not make much sense to get a HDHP simply for the purposes of HSA eligibility.

3. Can you pay for your medical expenses while potentially investing your HSA and reimbursing later?

Doing so could make HSA more favorable due to the ability to potentially grow the balance in a tax free manner. That said, there’s always risks to investing and no guarantee your funds will appreciate. 

4. Does your employer offer any HSA perks or matches?

Some employers help offset the cost of an HSA by offering a match or a specific fixed deposit. This could make the HDHP more attractive while still getting all the tax benefits.

Quick hypothetical example

Suppose you have an HDHP ($50/mo) and a PPO for $100/mo. 

With an individual HDHP, you can contribute a maximum of $4,300 to your HSA. If you are in a 30% tax bracket (federal + state), these contributions can generate ~$1,290 in tax savings. 

If you have no medical expenses (which is rare), you could save ~$1,290 + ($50/mo * 12 - plan difference cost) = ~$1,890 in total.

Now, if you happen to have $3,000 in medical expenses under the HDHP and pay them from your HSA, whereas the conventional plan requires you to pay $750 for the same expenses (due to better overall coverage, lower deductible and co-pays), the conventional plan (PPO) could beis the better deal. This is because $3,000 - $1,890 is $1,110 vs $750 cost under PPO plan.

Of course, these are all hypothetical and you can’t really predict these medical costs., But the important take away is that unless you plan to have limited or no medical expenses, it may not make sense to optimize for an HDHP + HSA just for the tax benefits. In addition, those who choose a PPO may be eligible for a Flexible Spending Account (FSA) which can offer similar, but more limited tax benefits.

State note

California and New Jersey do not give a state income tax deduction for HSA contributions, reducing the tax benefit of HSA contributions.

Overall, HSA can be a powerful way to reduce your tax bill for the right individuals and circumstances.

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If you want more resources on building wealth as a solopreneur/entrepreneur, check these out:

• The Solo 401k handbook

• The Roth IRA handbook

• The Self-Directed IRA handbook

• The Guide to Paying Less in Taxes

• What is a Solo 401k?

• How to Open a Solo 401k