The triple tax advantage
No other account in the tax code offers what HSAs provide:
- Tax-deductible contributions reduce your taxable income now (like Traditional 401k/IRA)
- Tax-free growth means investments compound without annual tax drag
- Tax-free withdrawals for qualified medical expenses—no tax ever
Traditional retirement accounts offer tax-deferred growth. Roth accounts offer tax-free growth but not deductible contributions. Only HSAs offer both benefits simultaneously.
For someone in the 24% federal bracket plus state taxes, a $4,150 HSA contribution (2024 individual limit) saves approximately $1,200 in taxes immediately—and that money can grow and be spent tax-free on medical expenses.
Eligibility requirements
HSAs aren’t available to everyone. You must:
Have a qualifying High Deductible Health Plan (HDHP). For 2024, this means a deductible of at least $1,600 (individual) or $3,200 (family), with out-of-pocket maximums not exceeding $8,050/$16,100.
Not be enrolled in Medicare. Once you’re on Medicare, you can no longer contribute (but can still use existing funds).
Not be claimed as a dependent on someone else’s tax return.
Not have other disqualifying health coverage like a general-purpose FSA (limited-purpose FSAs for dental/vision are okay).
If your employer offers an HDHP option, you likely qualify. Self-employed individuals can open HSAs if they purchase qualifying HDHP coverage through the marketplace or elsewhere.
Contribution limits
For 2024:
- Individual: $4,150
- Family: $8,300
- Additional catch-up (age 55+): $1,000
Limits include all contributions—employer and employee. If your employer contributes $500, your personal limit decreases by $500.
Contributions can be made until the tax filing deadline (April 15th of the following year), similar to IRA contributions. See IRS Publication 969 for detailed rules.
HSA vs. FSA
These accounts are often confused:
Flexible Spending Accounts (FSAs):
- Available with any health plan
- Use-it-or-lose-it (with some rollover allowances)
- Employer owns the account
- Can’t invest the funds
- Lost if you change jobs
Health Savings Accounts (HSAs):
- Require HDHP enrollment
- Funds roll over indefinitely
- You own the account forever
- Can invest in stocks, bonds, funds
- Portable across jobs
HSAs are superior in almost every way—if you qualify. The HDHP requirement is the main barrier.
The investment option
Most people use HSAs as healthcare checking accounts: contribute, spend on medical expenses, done. This captures the tax deduction but misses the bigger opportunity.
HSAs can be invested. Most HSA providers offer investment options once your balance exceeds a threshold (typically $1,000-2,000 kept in cash). You can invest the remainder in mutual funds, ETFs, or other options depending on the provider.
When invested, HSA funds grow tax-free. A $4,000 annual contribution invested in index funds for 20 years at 7% growth becomes roughly $175,000—all tax-free for medical expenses.
This makes the HSA a stealth retirement account with better tax treatment than traditional retirement accounts.
The optimal HSA strategy
Maximize contributions each year you’re eligible. The tax deduction and investment opportunity make this high-priority.
Invest rather than spend if you can afford to pay current medical expenses from other funds. Let the HSA compound.
Pay medical expenses from cash and keep receipts. You can reimburse yourself from the HSA at any point in the future—even decades later.
Reimburse yourself strategically. Medical expenses paid out-of-pocket now can be reimbursed tax-free whenever convenient. Some people accumulate years of receipts and take large HSA distributions in retirement to supplement income tax-free.
This strategy requires cash flow to pay medical expenses currently while letting the HSA grow. If current expenses must come from the HSA, that’s fine—the tax benefits still apply.
HSA in the retirement hierarchy
Where does the HSA fit in contribution priority?
Traditional sequence:
- 401(k) up to employer match (free money)
- High-interest debt payoff
- HSA maximum
- 401(k)/IRA to annual limits
- Taxable investing
Some financial experts rank HSAs even higher—above 401(k) match—because the triple tax advantage is so powerful. The right sequence depends on individual circumstances, but HSAs deserve high priority when available.
Qualified medical expenses
HSA funds can pay for a broad range of expenses tax-free:
- Deductibles, copays, coinsurance
- Prescriptions
- Dental care (exams, fillings, orthodontia)
- Vision care (exams, glasses, contacts, LASIK)
- Mental health services
- Certain medical equipment
- Medicare premiums (once on Medicare)
- Long-term care insurance premiums
Non-qualified withdrawals incur income tax plus a 20% penalty before age 65. After 65, the penalty disappears—non-qualified withdrawals are just taxed as ordinary income (like Traditional IRA withdrawals).
The IRS publishes detailed guidance on qualified expenses. When uncertain, save receipts and documentation.
Choosing an HSA provider
Employer-sponsored HSAs may have limited options. However, you can transfer HSA funds to any provider while employed (though employer contributions typically go to their designated provider).
For spending-focused use: Look for low fees, good debit card functionality, and easy claims.
For investment-focused use: Look for low-cost investment options (index funds), reasonable minimums for investing, and low administrative fees.
Fidelity’s HSA offers no fees and access to their full fund lineup. Lively offers low-cost administration with TD Ameritrade investment access. Compare providers if your employer’s option has high fees or poor investment choices.
Common HSA mistakes
Not contributing enough. Partial contributions capture partial benefits. Maximizing captures the full tax advantage.
Using HSA for all medical expenses. Spending HSA funds eliminates future tax-free growth. Pay from cash when possible.
Not investing. Leaving large HSA balances in cash sacrifices years of tax-free compounding.
Losing receipts. If you pay out-of-pocket planning to reimburse later, you’ll need documentation. Save receipts indefinitely.
Forgetting about it after job changes. Your HSA is yours forever. If you change jobs or health plans, the account remains. Continue managing and investing it.
The long-term perspective
For someone eligible from age 30-65, maximizing HSA contributions creates a substantial healthcare/retirement fund:
35 years × $4,150/year = $145,250 contributed At 7% average return: approximately $580,000
That’s a significant pool of tax-free money for medical expenses in retirement—when healthcare costs are typically highest. Any excess after age 65 functions like a Traditional IRA (taxed but no penalty for non-medical use).
The HSA may be the most underutilized tax-advantaged account available. If you qualify, it deserves attention.
HSA portability
Your HSA belongs to you—not your employer—which creates several advantages:
Job changes: The account moves with you. If you change jobs (even to one without HDHP), you keep the funds.
HDHP to non-HDHP: If you switch to a non-qualifying health plan, you can no longer contribute but can still use and invest existing funds.
Consolidation: Multiple HSAs from different employers can be consolidated into one preferred provider.
This portability makes the HSA a reliable long-term savings vehicle regardless of employment changes.
The HDHP trade-off
HSAs require HDHPs, which have higher deductibles. Is the trade-off worth it?
Favor HDHP + HSA when:
- You’re generally healthy with low medical expenses
- You can afford to pay the deductible if needed
- The premium savings exceed expected higher out-of-pocket costs
- You’ll maximize HSA contributions and invest the funds
Favor traditional plans when:
- You have chronic conditions requiring ongoing care
- You anticipate significant medical expenses
- The deductible would cause hardship if needed
- Premium differences are minimal
Many people who could benefit from HDHPs avoid them due to deductible anxiety. Running the actual numbers—comparing premiums, expected costs, and HSA tax savings—often reveals the HDHP option is financially superior even with moderate medical usage.
HSA vs. retirement accounts
Where does HSA fit in the savings hierarchy?
The triple tax advantage makes HSAs arguably superior to 401(k)s (which offer only pre-tax or post-tax benefits, not both) for those who can afford to let the funds grow. A reasonable priority might be:
- 401(k) to employer match
- HSA to maximum
- 401(k)/IRA to maximum
- Taxable investing
The catch: HSAs require HDHPs, which aren’t suitable for everyone. And using HSAs purely as retirement vehicles requires cash flow to pay medical expenses elsewhere. For those who can manage it, the tax benefits are unmatched.