Medical expenses are rising faster than inflation, and you’re probably paying more for healthcare than you should. A health savings account offers one of the smartest tax strategies available—letting you contribute pre-tax dollars, grow them tax-free, and withdraw them tax-free for qualified medical expenses.
If you’re enrolled in a high-deductible health plan (HDHP), you’re missing a significant opportunity if you’re not taking advantage of an HSA. These accounts have become powerful tools not just for managing healthcare costs, but also for building long-term wealth. Let’s explore how HSAs work and why financial experts call them the best-kept secret in personal finance.
What Makes Health Savings Accounts So Special?
A health savings account combines the benefits of a retirement account with the flexibility of a medical expense fund. You can only open one if you’re enrolled in a high-deductible health plan, but that’s becoming increasingly common as employers shift toward these plans.
The triple tax advantage sets HSAs apart from nearly every other savings vehicle. You contribute pre-tax dollars (or deduct contributions from your taxable income), your money grows tax-free through investments, and you pay zero taxes on withdrawals for qualified medical expenses. No other account offers all three benefits.
Think of an HSA as a 401(k) specifically for healthcare expenses. Unlike flexible spending accounts (FSAs), your HSA balance rolls over year after year. You own the account completely—it stays with you even if you change jobs or health plans.
HSA Contribution Limits for 2025
The IRS sets annual contribution limits that adjust for inflation. For 2025, you can contribute up to $4,300 if you have self-only coverage or $8,550 for family coverage. If you’re 55 or older, you can add an extra $1,000 as a catch-up contribution.
These limits apply to the total contributions from all sources. If your employer contributes to your HSA, that counts toward your annual limit. You’ll want to coordinate your personal contributions to avoid exceeding the maximum.
Many people make a strategic mistake by not maxing out their HSA contributions. Consider this: contributing the maximum family amount at age 35 and investing it conservatively at a 6% return could grow to over $37,000 by age 55. That’s significant healthcare purchasing power for your future.
Your contribution deadline extends until Tax Day of the following year, just like IRA contributions. This gives you extra time to maximize your tax benefits for the current year.
How HSAs Compare to Other Healthcare Accounts
Understanding HSA vs FSA differences helps you choose the right account for your situation. Flexible spending accounts require you to use the money within the plan year (though some employers offer a small grace period or carryover). HSAs have no such restriction.
FSAs typically allow anyone with employer-sponsored health insurance to participate. HSAs require you to have a high-deductible health plan, which for 2025 means a minimum deductible of $1,650 for individuals or $3,300 for families.
You also can’t have any other health coverage that’s not an HDHP, with some exceptions for specific injury insurance or disability coverage. This means you can’t contribute to an HSA if you’re also covered by your spouse’s traditional health plan or enrolled in Medicare.
The investment component of HSAs represents another major distinction. While FSAs simply hold your cash, most HSA providers let you invest your balance once you reach a minimum threshold (often $1,000 to $2,000). This transforms your HSA from a spending account into a wealth-building tool.
What Qualifies as an HSA-Eligible Expense?
The IRS defines qualified medical expenses broadly, covering most healthcare costs you’d expect. Doctor visits, prescription medications, dental care, vision expenses, and mental health services all qualify. You can use HSA funds for your spouse and dependents too, even if they’re not covered by your HDHP.
Some expenses surprise people. Contact lenses and reading glasses qualify, along with their cleaning solutions. Acupuncture, chiropractic care, and even some weight-loss programs qualify when medically necessary. You can pay for bandages, blood pressure monitors, and diabetes testing supplies.
Over-the-counter medications now qualify without a prescription, thanks to recent rule changes. Pain relievers, allergy medications, and cold medicine all count. Menstrual care products like tampons and pads also qualify.
What doesn’t qualify? Cosmetic procedures, gym memberships (unless prescribed for a specific medical condition), and health insurance premiums for most people under 65. Once you’re enrolled in Medicare, you can use HSA funds to pay Medicare premiums except for supplemental policies.
Keep your receipts. The IRS doesn’t require you to submit proof when you make a withdrawal, but you need documentation if you’re ever audited. Many HSA account holders photograph receipts and store them digitally for easy access.
Strategic Ways to Maximize HSA Benefits
The most sophisticated HSA users treat these accounts as stealth retirement accounts. If you can afford to pay medical expenses out of pocket, consider leaving your HSA balance invested for maximum growth. You can reimburse yourself years or even decades later for those out-of-pocket expenses.
This approach works because the IRS doesn’t impose a time limit on reimbursements. Save your medical receipts from today, let your HSA grow, and withdraw that money tax-free in 20 years. Meanwhile, your balance compounds through investment returns.
Some people max out their HSA contributions before contributing to their 401(k) beyond the employer match. The logic makes sense: if you’re certain you’ll have medical expenses in retirement (and you will), the triple tax benefit beats the double tax benefit of traditional retirement accounts.
Front-loading your contributions early in the year gives your money more time to grow through investments. If you can contribute the full annual amount in January instead of spreading it across 12 months, you’ll capture additional market gains.
Remember that creating a realistic budget helps you identify room for HSA contributions. Many people find that cutting monthly expenses frees up funds they can redirect toward maximizing their health savings account.
Investment Options and Growth Strategies
Once your HSA balance reaches your provider’s investment threshold, you can typically choose from mutual funds, target-date funds, or even individual stocks through some providers. The investment options vary significantly between HSA administrators, so this matters when selecting a provider.
Conservative investors often choose target-date funds that automatically adjust asset allocation as they age. More aggressive savers might allocate heavily toward stock index funds, especially if they’re young and won’t need the money for decades.
Keep a cash cushion for near-term medical expenses. A common strategy involves keeping your annual deductible in cash (earning minimal interest) while investing everything above that amount. This ensures you can pay unexpected medical bills without selling investments at a loss.
HSA investment fees deserve attention. Some providers charge monthly maintenance fees, transaction fees, or high expense ratios on investment options. Shop around—you’re not limited to your employer’s HSA provider if they offer one. You can open your own HSA with any qualified administrator and receive the same tax benefits, though employer contributions may require using their provider.
Your investment time horizon matters significantly. If you’re planning to use HSA funds soon for planned procedures, keep that money in stable value funds or cash. Only invest money you won’t need for at least five years, giving it time to recover from market downturns.
HSAs in Retirement: Your Secret Healthcare Weapon
After age 65, HSAs become even more flexible. You can withdraw money for non-medical expenses without penalty, though you’ll pay income tax on those withdrawals (just like a traditional IRA). This makes your HSA function as an additional retirement account if you don’t need the funds for healthcare.
Healthcare represents one of the largest expenses in retirement. The average couple retiring today will spend over $300,000 on healthcare throughout retirement, even with Medicare coverage. Your HSA provides tax-free funding for these substantial costs.
Medicare premiums for Parts B and D qualify for HSA withdrawals once you’re enrolled. Medicare Advantage premiums also qualify, though Medigap supplemental insurance premiums don’t. Long-term care expenses and long-term care insurance premiums qualify up to specific age-based limits.
The ability to pay Medicare premiums tax-free gives HSAs an advantage over traditional retirement accounts. Pulling money from a 401(k) to pay Medicare premiums triggers income taxes. Using HSA funds for the same purpose keeps that money completely tax-free.
Consider coordinating your retirement savings strategy with your HSA contributions. Since healthcare costs rise significantly in retirement, having a dedicated tax-free source for these expenses provides valuable diversification from your taxable and tax-deferred accounts.
Common HSA Mistakes to Avoid
Many people lose their HSA eligibility without realizing it. Signing up for Medicare at age 65 makes you ineligible to contribute to an HSA, even if you’re still working. Stop contributions six months before enrolling in Medicare to avoid penalties, since Medicare Part A coverage gets backdated six months.
Some workers accidentally disqualify themselves by enrolling in their spouse’s FSA if it covers them. A general-purpose FSA that covers your medical expenses conflicts with HSA eligibility requirements. Limited-purpose FSAs for dental and vision only don’t create this problem.
Forgetting to change your HSA contributions when you switch from family to individual coverage (or vice versa) can cause you to exceed contribution limits. This triggers penalties unless you withdraw the excess contributions before tax filing deadlines.
Using HSA funds for non-qualified expenses before age 65 costs you twice. You’ll pay income tax plus a 20% penalty on the withdrawal. This harsh penalty makes it critical to understand what qualifies before swiping your HSA debit card.
Not taking advantage of employer HSA contributions wastes free money. Some employers contribute to your HSA as part of their benefits package or match your contributions. That’s free money amplified by the triple tax benefit.
Getting Started with Your Health Savings Account
First, confirm your health plan qualifies as an HDHP. Check your plan documents or ask your HR department. Your plan must meet the minimum deductible requirements and not exceed the maximum out-of-pocket limits set by the IRS.
If your employer offers an HSA, starting there usually makes sense, especially if they contribute or match. You can always transfer funds to a different HSA provider later if you find better investment options or lower fees.
When shopping for an HSA independently, compare maintenance fees, investment minimums, investment options, and expense ratios. Several online providers have eliminated monthly fees and offer low-cost index funds, making them attractive alternatives to bank-administered HSAs with limited options.
Set up automatic contributions through payroll deduction if possible. This ensures consistent saving and makes it easier to maximize your annual contribution. The pre-tax treatment through payroll also saves you Social Security and Medicare taxes, a benefit you don’t get from contributing to an HSA outside of payroll.
Start tracking your medical expenses immediately, even if you plan to pay them out of pocket now. Document everything with receipts, explanation of benefits statements, and notes about the expense. This creates a "bank" of reimbursements you can claim whenever you need them.
Your health savings account represents more than just a way to pay medical bills. It’s a powerful wealth-building tool that offers tax advantages unavailable elsewhere. Whether you use it to cover current healthcare costs or invest for future medical expenses in retirement, an HSA deserves a prominent place in your overall financial strategy. Start maximizing your contributions today, and your future self will thank you when healthcare bills arrive and you can pay them with money that was never taxed.
