New HSA Contribution Limits for 2025 have been announced. Learn how to maximize your HSA and its potential to bolster your financial security.
In the ever-evolving landscape of healthcare, understanding and optimizing your benefits can significantly impact your financial well-being. One avenue that's gained traction in recent years is the Health Savings Account (HSA), particularly for federal employees. With the IRS updating contribution limits for 2025, there's even more reason to take a closer look at how HSAs can benefit you.
New Contribution Limits for 2025
The IRS has recently increased limits to HSA savings contributions for 2025. Beginning January 1st, individuals with self-only coverage can contribute up to $4,300 to their HSAs, while those with family coverage can contribute up to $8,550 to their plans. These increases from the previous limits of $4,150 and $8,300, respectively, provide individuals and families with greater flexibility in managing their healthcare expenses in the face of inflation.
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Remember, to qualify for an HSA, you must enroll in a high-deductible health plan (HDHP). Fortunately, federal employees have access to a range of HDHP options through the Federal Employees Health Benefits (FEHB) program. Keep this in mind during open season this fall! If an HSA is right for you, you’ll need to be sure to choose an HSA-compatible high-deductible health plan.
The Power of Investing Your HSA
While having an HSA is valuable for the current year tax deduction alone (more on that in a moment), it's crucial to maximize its potential by investing your funds wisely. Many HSAs have a minimum cash requirement, typically around $1,000. Once you've met this threshold, you can invest the excess cash in the HSA for growth in the market. This strategy is particularly beneficial for younger federal employees or those with minimal healthcare expenses and no dependents, as it allows the invested funds to grow over time, providing a financial cushion for future healthcare needs.
The Triple-Tax Benefits of HSAs
One of the most significant advantages of HSAs is their triple-tax benefits. Contributions are made on a pre-tax basis, reducing your taxable income and providing a tax deduction for the year in which the contribution was made. Those invested funds in the HSA grow on a tax-free basis, and withdrawals for qualified medical expenses are also tax-free at any time. Click here for a comprehensive list of what's considered a qualified expense.
Beware, Beneficiaries!
While HSAs offer numerous benefits during your lifetime, they may not be the ideal inheritance vehicle for your beneficiaries. A spouse beneficiary can inherit an HSA and continue to make tax-free distributions for qualified healthcare expenses as if it were their HSA all along. If a non-spouse beneficiary inherits an HSA, however, the account will be cashed out and fully distributed them immediately, and 100% of that income is fully taxable in the year of distribution. Because of this issue, retirees who are carrying an HSA into retirement are usually well-advised to spend down their HSA money first. HSA funds can be used by those 65 and older to pay for Medicare premiums (long-term care insurance premiums are also HSA-eligible expenses for folks of any age!). Additionally, once you reach 65, the 20% penalty on non-qualified medical expenses no longer applies, so you can treat your HSA like a Traditional IRA! You can pull money out from your HSA for anything you like and only have to worry about paying income tax (since you didn't pay any taxes on the money you put into the HSA upfront). Considering that medical expenses are often the number one expense facing Americans in retirement, though, most folks find that there isn't any shortage of medical expenses and insurance premiums to tap into their HSA to cover.
As a Fed, maximizing your HSA can significantly impact your financial security, both now and in the future. Be sure to revisit your contributions – or consider signing up for an HSA-eligible health plan during FEHB open season later this year – to take advantage of this vehicle’s powerful triple-tax benefit. With careful planning and strategic utilization, your HSA can become an integral tool in your retirement toolbox.
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Katelyn Murray, CFP®, ChFEBC℠, FBS®, CFT-1™: Relationship Team Lead & Financial Planning Expert
Katelyn is a financial advisor with over a decade of experience working with Feds to build a healthy, balanced relationship with money and to design and enjoy the retirement of their dreams. In addition to her CERTIFIED FINANCIAL PLANNER™ and Chartered Federal Employee Benefits Consultant℠ designations, Katelyn also holds a Master in Business Administration as well as a graduate certificate in financial psychology and behavioral finance. Her unique approach merges financial psychology with traditional wealth management expertise to create an integrated financial planning approach that helps clients make the most of the one resource they can’t get more of: time.
Here at Serving Those Who Serve, Katelyn serves as our Director of Relationship Management, mentoring our advisors and guiding our client experience. She also co-hosts The Fed15 podcast each week with STWS founder Dan Sipe.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
**Written by Katelyn Murray, CFP®, ChFEBC®, FBS®, CFT-1™, ECA. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Katelyn Murray and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
