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HEALTH SAVINGS ACCOUNT (HSA) is the most efficient tax-advantaged investment account because it offers a triple tax advantage:
One of the best uses of an HSA is to actually invest the balance.
For example, I keep $500 (the minimum required balance) in cash. The rest, I invest in low-cost index funds. This allows me to maximize compounding inside the HSA account.
I also receive a $1,000 HSA match. Since I’m young and my medical expenses are low, it’s a great way to minimize taxes and grow the balance. I will also not touch my HSA at all, even if I have medical expenses. I will reimburse myself 20-30 years down the road (more on this in a bit).
But if you are paying medical expenses with the HSA, you should have at least a portion of the funds in a Treasury fund or money market fund (MMF) for stability. Generally, this amount should be equal to at least one year of deductible costs.
Rules
To contribute to an HSA, three things must happen:
Importantly, before enrolling in a high deductible plan, you need to decide whether it’s worth it in the first place. You will generally receive the biggest benefit from an HDHP if you are in good health (more on this in a bit).
2. You aren’t enrolled in Medicare.
3. You cannot be claimed as a dependent.
Importantly, the HSA balance never expires. This account is always yours to keep, even if you leave your employer. Some people confuse an HSA with an FSA (which does expire, aside from a small potential rollover option).
The account typically works like a “bank account,” where you make deposits and can withdraw money via online transfers or checks, or invest it like a brokerage account.
Contributions
The 2026 contribution limit is $4,400 for an individual plan and $8,750 for a family plan, with an additional $1,000 catch-up contribution if you are 55 or older.
The contribution limit includes both your contributions and your employer’s contributions.
If your employer allows it, contributing to an HSA via payroll deduction is generally better than contributing directly, as it avoids the 7.65% FICA (Social Security and Medicare) taxes. Direct, after-tax contributions only save on income tax when filing, missing the payroll tax savings.
Withdrawals
Withdrawals for medical expenses are tax-free. IRS Publication 502 has information about which expenses qualify as medical expenses.
In addition, as long as you keep proper records, you can reimburse yourself in a later year.
I keep track of all my medical expenses in a spreadsheet (e.g., with columns for EOB documents, receipts, bills, etc). I plan to reimburse myself in the future, assuming the law doesn’t change. In 2025, House Bill 6183 was proposed to change the reimbursement limit to expenses no older than two years, but it didn’t gain any traction. If there is a change in legislation, I plan to reimburse myself for all prior medical expenses before enactment.
Once you turn 65, you can withdraw money from your HSA for any reason without penalty. However, you will owe income taxes on any non-medical withdrawals, effectively making this similar to a Traditional 401(k) or IRA.
Inheriting an HSA
Per Publication 969, if your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.
If your spouse isn’t the designated beneficiary (e.g. your child is the beneficiary), the account stops being an HSA and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you pass away.
This is why tax free HSA dollars should ideally be spent before passing down an inheritance due to tax inefficiency. On the other hand, naming a beneficiary in a low-income tax bracket to receive the deceased person’s HSA can also be beneficial for tax purposes.
HSA can be powerful, but make sure the math makes sense. If you spend thousands of dollars on medical bills, having a standard plan could outweigh all the tax savings you can get.
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
Excellent summary, Bogdan! Mr. Quinn is right, it’s certainly no panacea for the health insurance challenges many face, but it can be a great tool. I’m 71 and still have a nice HSA balance that I dip into frequently for the infrequent OOP costs I face with traditional Medicare (like hearing aids, dental, etc.). I invested my HSA as Bogdan suggests, and it paid off pretty well. The triple tax advantaged attribute makes it the best tax shelter going. I guess, like many things in our system, HDHPs/HSAs work best for those with enough resources to weather the occasional rough seas. Have that Emergency Fund, folks!!
HSAs have been around since 2004. The (false) idea was they would help employees become better health care consumers if they were spending their own money. Employers latched on to the idea as a way to shift costs and more risk to workers. The employer gets guaranteed savings, the worker doesn’t.
Yes, with a HDHP the premiums are lower, but even if those premium savings were all placed the the HSA, it’s not enough to cover the out of pocket risk in many cases. Added savings are necessary, especially for families.
HSAs may be a good idea for the healthy and higher income families, not so good for more average people who now are self-insuring more OOP costs. The family now must save for health care, retirement, possibly college and hopefully an emergency fund. And we have also placed the burden of investment decisions on more unprepared families.
All can go well for years, but then the HSA could be depleted quickly with a period of illness in a family. That has happened to two of our sons.
If the illness or another illness extends over two calendar years, the situation is even worse with two high deductibles in a row depleting the HSA.
Once the accumulated funds are exhausted the HSA is useless until the fund is replenished.
Many workers no longer have a choice and must use an HSA, but it is not a pretty picture for many.