Written by: Christian Dunker | Financial Partners Group
The Roth IRA’s tax-free growth is a favorite for long-term savers, but its 2025 contribution limits, $7,000 for those under 50, $8,000 for 50+, restrict its potential, and contributions aren’t tax-deductible (IRS, 2025). Imagine if an account offered both tax-free growth and tax-deductible contributions. Enter the Health Savings Account (HSA), often seen as a simple medical savings tool but, in reality, is a powerful vehicle with a rare triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses (Forbes, 2024). For high earners looking to lower adjusted gross income (AGI) and maximize tax-advantaged savings, HSAs are a game-changer.
HSA Basics
To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP) with a minimum deductible of $1,650 for individuals or $3,300 for families in 2025 (IRS, 2025). Contribution limits are $4,300 for individuals, $8,550 for families, plus a $1,000 catch-up for those 55+, due by April 15, 2026 (IRS, 2025). Contributions reduce your taxable income, and funds can be spent using an HSA debit card for qualified expenses like doctor visits, prescriptions, or dental care (HSA Bank, n.d.).
Unlike a checking account, HSAs allow investing in mutual funds, stocks, or ETFs, like a 401(k) or IRA (Optum Bank, n.d.). For those using HSAs as a pass-through account, swiping the debit card or reimbursing expenses immediately, keep your deductible (e.g., $1,650) in cash to avoid declined transactions. If investments must be sold to cover expenses, you can reimburse yourself the same year, making record-keeping straightforward (IRS, 2025). However, a more powerful strategy exists for those with sufficient cash flow.
Maximizing Tax-Free Growth: Pay Out of Pocket
By paying qualified medical expenses out of pocket and delaying HSA reimbursements, you can let funds grow tax-free for years. There’s no deadline to reimburse yourself, enabling strategic withdrawals, such as in retirement, when tax-free funds can supplement income (Forbes, 2024). Unlike Roth IRAs, which restrict tax-free withdrawals to after age 59½, HSAs allow tax-free withdrawals for medical expenses at any age, enhancing
To see the pay-out-of-pocket strategy in action, consider a client, a high-earning business owner who maximizes tax-advantaged accounts and has an HSA with a $30,000 balance. Late last year, his wife faced a significant medical expense. Rather than withdrawing from the HSA, we paid out of pocket, preserving the account’s tax-free growth. By keeping meticulous records, he can reimburse himself tax-free later, potentially in retirement, allowing the HSA to compound undisturbed (Forbes, 2024).
Why does this matter? Tax-free growth significantly outpaces taxable accounts. For instance, compare a Roth IRA or HSA to a taxable brokerage account over 20 years at a 10% annual growth rate. The tax-free account avoids long-term capital gains taxes, yielding an almost $20,000 greater return than the taxable account, which faces a 15% tax on gains (IRS, 2025). This advantage illustrates why delaying HSA reimbursements can build substantial wealth, especially for those 10+ years from retirement. The key is maintaining detailed expense records to justify tax-free withdrawals if audited (IRS, 2025).
Practical Tips
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Choose a low-cost HSA provider with robust investment options (e.g., Fidelity, Optum Bank).
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Track expenses using budgeting apps or spreadsheets.
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Keep digital records of medical expenses in a digital vault like eMoney.
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Not all HSA providers allow full investment flexibility
HSAs offer unmatched tax benefits, surpassing even Roth IRAs with deductible contributions and flexible withdrawals. By paying medical expenses out of pocket, you can supercharge tax-free growth, building wealth for medical or retirement needs. Check your HSA provider’s options for details to start leveraging this powerful tool today (IRS, 2025).
Related: An Alternative Way To Invest in the S&P 500
Citation
https://www.fidelity.com/learning-center/smart-money/hsa-contribution-limits
https://www.irs.gov/publications/p969
https://www.forbes.com/sites/davidrae/2024/12/02/the-new-2025-health-savings-accounts-hsa-limits-explained/
https://www.hsabank.com/Learning-Center/IRS-contribution-limits-and-guidelines.html
https://www.optumbank.com/resources/library/contribution-limits.html
https://www.shrm.org/topics-tools/news/benefits-compensation/irs-announces-2025-hsa--hdhp-limits