How HSAs can help you unlock tax savings and manage health care costs

Health Savings Accounts, or HSAs, stand apart in a crowded field of account options. They are the only triple‑tax‑advantaged account available to investors and can help build long‑term savings for qualified health care expenses, a major source of stress and spending in retirement. Our research found that median annual health care costs in retirement range from $4,300 to $6,400, depending on insurance coverage.

But before diving in, investors need to understand the unique rules and features of HSAs to maximize tax savings and avoid costly penalties.

How do Health Savings Accounts work?

When choosing health coverage for the coming year, you may have the option to enroll in a high‑deductible health plan (HDHP). Doing so makes you eligible to contribute to an HSA, either through your employer or on your own. An HSA is designed to pay for out‑of‑pocket medical expenses, such as a deductible, now or later.

HSAs offer a “triple tax benefit” for federal taxes:

• Contributions reduce taxable income.
• Account growth is tax‑deferred.
• Withdrawals for qualified medical expenses are tax‑free.

This means HSAs combine benefits of both Roth and pretax retirement accounts. So if you can choose between an HSA‑eligible HDHP and a traditional low‑deductible plan, how should you decide?

How high are your expected medical expenses?

First, make sure the HDHP fits your situation.

With most health plans, your total cost includes premiums, deductibles, and coinsurance. HDHPs usually have lower premiums but higher deductibles and often higher coinsurance, so the more care you expect to need, the more a traditional plan may make sense.

Your employer may offer comparison tools, or you can estimate costs yourself. In many cases, the break‑even point is roughly the difference in premiums plus the traditional plan deductible.¹

You should also compare prescription cost provisions, out‑of‑network rules, employer HSA or health reimbursement arrangement (HRA) contributions, and especially out‑of‑pocket maximums, since medical needs are hard to predict. For many people who can’t save enough to take advantage of long‑term HSA tax benefits, that insurance comparison is enough. For example, if the traditional plan includes a Flexible Spending Account (FSA), it can offer similar short‑term tax benefits as an HDHP with an HSA.

What are the long‑term tax benefits of an HSA?

If you can invest for the long term instead of using the HSA for current‑year expenses, you can realize the full triple‑tax benefit.

An HSA can offer greater tax benefits than Roth or pretax retirement accounts when withdrawals are used for qualified medical expenses. The value depends mainly on your time horizon, tax rate, and investment returns. Using conservative assumptions, we compared a $4,400 HSA contribution with other tax‑advantaged savings options.

For example, if your marginal tax rate is 25%, you’re 15 years from retirement, and you invest a full 2026 HSA contribution of $4,400 once and hold it until retirement, it could be worth about $1,350 more than a comparable retirement account contribution in today’s dollars. So even if a traditional plan appears $1,000 cheaper based on expected 2026 expenses, the added tax benefit could still make an HDHP with an HSA worthwhile.

What are three ways to use my HSA?

There are three ways to maximize an HSA’s potential, depending on your situation:

1. Good: Contribute the amount of medical expenses you expect to incur in a year.

With this approach, you get two of the three HSA tax benefits: deductible contributions and tax‑free withdrawals. And unlike an FSA, any unused HSA balance carries over rather than being forfeited. But because the balance may stay small and in cash, you likely won’t benefit much from tax‑deferred growth.

2. Better: Cover your expected medical expenses—and then some.

Aim to build the account to cover one or more years of maximum out‑of‑pocket costs. Use it only for large or unusual medical expenses, not routine ones. This can help you build a reserve for major health costs and begin benefiting from tax‑free growth.

3. Best: Max out contributions and invest for the long term.

This gives you the full triple tax benefit. For 2026, contribution limits are $4,400 for individual coverage and $8,750 for family coverage. With this approach, you should have an investment strategy for your HSA just as you would for a retirement account. Because HSA earnings are tax‑free if used properly, you may want to invest more aggressively earlier in your career and shift to a more conservative mix as retirement nears.

If you can use this long‑term strategy, the HSA can help cover significant retirement expenses. Using tax‑free distributions instead of tax‑deferred accounts may also help you avoid moving into a higher tax bracket or paying higher Medicare premiums.

Are any tax penalties involved?

Just as HSAs offer unmatched tax savings, the penalties for misusing them can be significant:

• Using HSA funds for nonqualified expenses can be costly. Before age 65, you’ll owe ordinary income tax plus a 20% penalty. After 65, nonqualified withdrawals are taxable but not penalized. Be aware that some expenses you might assume qualify—such as certain health insurance premiums—do not qualify. Especially before age 65, nonmedical withdrawals should be a last resort.
• Leaving a large HSA to a non‑spouse can create a tax burden. The full balance becomes taxable to the beneficiary in the year of inheritance and may push them into a higher tax bracket. That’s why it often makes sense to spend down the account in retirement for medical expenses. A spouse who inherits the HSA can assume ownership without owing tax on the balance.

A few final tips about HSAs

• Contributions made through payroll deductions are generally not subject to payroll taxes, so that is usually the most tax‑efficient way to contribute.
• If you want to save more than your payroll deductions, you can make additional contributions on your own, up to Internal Revenue Service limits.
• An HSA should not be treated as an emergency fund because of taxes and possible penalties on nonqualified withdrawals.
• Once enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the funds for Medicare premiums, out‑of‑pocket costs, and part of long‑term care policy premiums. Medigap premiums do not qualify.
• The HSA is owned by the individual, so you keep the balance if you change jobs and never forfeit unused funds.
• If you are reviewing tax year contribution opportunities, see How to save yourself money by lowering your 2025 taxes for additional insights on deductible contributions, including HSAs.

Don’t worry if you’re not currently able to use your HSA as a long‑term savings vehicle. Using it to cover projected medical expenses is still a good strategy, especially if you have other priorities such as saving for a home or education. By understanding their requirements and unique benefits, you can use HSAs to enjoy near‑term tax savings, build wealth over time, and be better prepared for health care expenses in retirement.