How to Use an HSA to Build Wealth

Quick Answer: How an HSA Builds Wealth Fast

A Health Savings Account (HSA), or hsa health savings accounts, can function like a “stealth IRA” by combining three powerful tax benefits into one vehicle. You get tax deductible contributions that reduce your taxable income, your investments grow tax free inside the account, and you can take tax free withdrawals for qualified medical expenses at any age. No other account in the U.S. tax code offers this triple tax advantage.

For many high earners in the 22%–35% tax brackets, consistently maxing out an HSA from 2025 onward can add tens of thousands—even hundreds of thousands—of dollars to retirement wealth over 20–30 years. Unlike flexible spending accounts with their use-it-or-lose-it rules, HSA funds roll over indefinitely and can be invested like any other retirement account. Many individuals use their HSA only for short-term medical expenses, missing the opportunity for long-term wealth building.

Here’s a concrete example: A 35-year-old contributing the 2025 family maximum of $8,550 every year, earning 7% annually, could have well over $400,000 in tax-advantaged HSA assets by age 65 (before withdrawals). That’s a significant chunk of retirement savings built from an account most people underutilize.

Why HSAs are uniquely powerful:

• Triple tax benefit: pre tax dollars go in, grow tax free, and come out tax free for medical spending

• Funds roll over forever with no annual expiration

• No required minimum distributions like traditional IRAs or 401(k)s

• After age 65, you can use HSA money for anything (taxed as ordinary income, but no penalty)

• The account stays with you regardless of job changes or health plan switches

This article covers everything you need to know: eligibility requirements, contribution limits for 2025, the tax treatment that makes HSAs so valuable, proven strategies for investing HSA funds, age-based playbooks from your 20s through retirement, and step-by-step action items to start building wealth with your HSA today. If you want personalized guidance on integrating HSAs into your overall wealth strategy, consider consulting a financial advisor.

How an HSA Works

HSAs are one of several tax favored health plans available to individuals with high deductible health plans, offering unique tax benefits and flexibility. While the primary purpose is to help cover healthcare expenses, savvy account holders use HSAs as long-term wealth-building vehicles that rival—and often surpass—traditional retirement accounts.

The core mechanics are straightforward. To contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). Both you and your employer can contribute up to IRS limits each year. The account is individually owned and fully portable, meaning it stays with you regardless of job changes, plan switches, or even if you later move to non-HDHP health insurance coverage. Contributions to an HSA can also be automated through payroll deductions, similar to a 401(k).

One of the most important features is the rollover rule: unused funds roll over indefinitely. There’s no “use it or lose it” provision like you’ll find with many flexible spending accounts. If you leave your HDHP for another type of health plan, you keep your existing HSA and can continue to invest and withdraw funds—you simply cannot make new hsa contributions while ineligible.

Qualified medical expenses cover a broad range: deductibles, copays, prescription drug coverage, over the counter medications (since 2020), dental expenses, vision care, and many other health care costs. The authoritative list lives in IRS Publication 502, which is worth bookmarking if you plan to use the shoebox strategy discussed later.

Key HSA rules of the road:

• Must be enrolled in an HSA-eligible HDHP to contribute

• Individual ownership means the account follows you, not your employer

• Funds never expire and roll over year after year

• Investments can include mutual funds, ETFs, and other securities

• State tax treatment varies (California and New Jersey, for example, tax HSA earnings at the state level)

• You can withdraw funds for qualified expenses at any age, tax-free and penalty-free

HSA Contribution Limits and Eligibility (2025 and Beyond)

The IRS sets HSA contribution limits annually, adjusting them for inflation. These limits differ based on whether you have self-only or family health insurance coverage, with an additional catch-up contribution available for those 55 and older.

For 2025, the IRS hsa contribution limits are:

• Self-only coverage: $4,300

• Family coverage: $8,550

• Catch-up contribution (age 55+): Additional $1,000

These limits represent the combined total from all sources—your payroll deductions, employer contributions, and any after-tax contributions you make directly.

To be eligible, you must meet all of these conditions: enrolled in an HSA-eligible HDHP, not enrolled in Medicare, not claimed as a dependent on someone else's tax return, and not covered by disqualifying “first-dollar” coverage like a general-purpose FSA that pays for medical expenses before you meet your deductible. If you are claimed as a dependent on someone else's tax return, you are not eligible to contribute to an HSA. Additionally, if someone else makes contributions on your behalf while you are a dependent, those contributions may be treated as gifts and may not be deductible on your own tax return.

Contributions typically come from three sources. Pre tax dollars through payroll deductions offer the most tax savings because they reduce both federal income tax and FICA payroll taxes. If contributing through payroll deductions, HSA funds are typically exempt from FICA taxes, providing a 7.65% savings. Employer contributions count toward your annual limit but represent free money. After-tax contributions made directly to your HSA provider can be deducted on your tax return, reducing your income taxes.

The contribution deadline extends past December 31. You can contribute up to the prior-year limit until the federal tax filing deadline—typically April 15 of the following year. For 2025 contributions, this means you have until April 15, 2026, to max out your account.

Quick reference:

• 2025 self-only limit: $4,300

• 2025 family limit: $8,550

• 55+ catch-up: $1,000 additional

• Contribution deadline: Tax filing deadline (April 15, 2026 for 2025)

• Eligibility tests: HDHP enrolled, not on Medicare, not a dependent on someone else’s tax return, no disqualifying coverage

In 2026, the maximum contribution limits will increase to $4,400 for self-only coverage and $8,750 for family coverage.

Tax Advantages: Why HSAs Are a “Stealth IRA”

The triple tax advantage makes HSAs arguably the most tax-efficient savings vehicle available to American workers. Here’s how it works: contributions are pre-tax or tax deductible (reducing your taxable income), growth occurs tax deferred inside the account—this tax deferred growth allows your investment earnings to compound over time without being reduced by annual taxes—and withdrawals for qualified medical expenses are completely tax free. No income taxes, no capital gains taxes, nothing.

Compare this to Traditional and Roth IRAs. HSA contributions work like Traditional IRA contributions—they reduce your taxable income in the year you contribute. But qualified withdrawals work like Roth IRA distributions—completely tax free. And unlike Traditional IRAs and 401(k)s, HSAs have no required minimum distributions forcing you to withdraw funds at a certain age. With traditional IRAs and 401(k)s, you must pay taxes on required minimum distributions after age 73, which is an important consideration for retirement planning.

Let’s put numbers to this. Contributing $4,300 in 2025 at a 24% federal tax rate saves about $1,032 in federal income tax that year. But that’s just the contribution benefit. If those funds are invested and grow at 7% annually for 20 years, you’d have roughly $16,600—all of which can be withdrawn tax free for qualified medical costs. In a taxable account, you’d owe capital gains taxes on that growth. In a Traditional IRA, you’d pay income taxes on every dollar withdrawn.

Non-medical withdrawals follow different rules. Before age 65, any withdrawal for non medical expenses gets hit with ordinary income tax plus a 20% penalty—a steep price that makes early non-medical withdrawals a last resort. After age 65, that penalty disappears. Non-medical withdrawals are taxed as ordinary income but carry no penalty, effectively making your HSA function like a Traditional IRA for non-healthcare spending.

For W-2 employees, there’s an additional benefit worth noting. When contributions are made via salary reduction through your employer, you save on FICA payroll taxes (7.65% for most workers) in addition to federal income tax. This combined tax savings can exceed 30% for many workers—an immediate return that’s hard to match elsewhere.

Summary of tax benefits:

• Contributions reduce taxable income (like Traditional IRA)

• Investment earnings compound without annual taxes (tax deferred growth)

• Qualified medical withdrawals are tax free (like Roth IRA)

• No RMDs at any age

• Before 65: non-medical withdrawals = income tax + 20% penalty

• After 65: non-medical withdrawals = income tax only (no penalty)

• Payroll contributions also avoid FICA taxes (7.65%)

Core Strategies to Use an HSA to Build Wealth

The real power of an HSA account emerges when you stop thinking of it as a spending account and start treating it as a long-term wealth-building tool. Many HSA accounts allow you to invest your savings in stocks, bonds, and mutual funds once your account reaches a minimum balance, which can help save money and build wealth. Investing HSA funds in these vehicles can provide potentially higher long-term growth than standard savings accounts. The biggest gains come from investing aggressively and delaying withdrawals as long as possible, letting your investment portfolio compound without the drag of annual taxes.

Core strategies for maximizing HSA wealth:

• Max out contributions every year you’re eligible

• Invest aggressively based on your time horizon and risk tolerance

• Pay current medical expenses out of pocket when financially feasible

• Use the “shoebox strategy” to bank tax-free reimbursements for the future

• Integrate your HSA into your overall retirement planning

These strategies work best for people who can cash-flow routine healthcare costs from regular income or emergency funds. If you’re living paycheck to paycheck or facing major medical bills, using your HSA for current needs makes sense. But if you have a multi-decade time horizon and stable finances, the approaches below can add six figures to your net worth. To maximize your savings, it’s crucial to select an HSA provider with low administrative fees and robust investment options.

The following sections break down each strategy in detail. Later, you’ll find age-based playbooks showing how to adapt these tactics whether you’re in your 20s just starting out or in your 60s approaching Medicare.

Max Out Contributions Annually

Consistently hitting the IRS maximum is the foundation of using an HSA to build wealth. Every dollar you contribute reduces your taxable income immediately while creating the potential for decades of tax free growth.

For 2025, that means contributing up to $4,300 for self-only coverage or $8,550 for family coverage. If you’re 55 or older, add another $1,000 in catch-up contributions. The IRS typically adjusts these limits annually for inflation, so expect gradual increases over time.

Practical tactics to hit your max:

• Set up automatic payroll deductions at the beginning of the year

• Increase contributions with each raise (you won’t miss money you never see)

• If you start mid-year, calculate the monthly amount needed to reach the full-year limit by the tax-filing deadline

• Consider making a lump-sum contribution in January if cash flow allows

Here’s a long-term illustration: Maxing the family limit of $8,550 from age 40 to 65 (25 years) at a 6% annual return could grow to roughly $500,000 earmarked for future medical expenses and retirement support. That’s half a million dollars built from money that would otherwise have gone to income taxes.

Prioritization tip: Capture your full 401(k) employer match first (that’s free money), then prioritize maxing your HSA before making additional tax-deferred contributions beyond the match.

Treat Your HSA as an Investment Account

Leaving large HSA balances sitting in cash is one of the most common mistakes people make. Cash might earn 0.5%–2% annually. A diversified investment portfolio has historically returned 7%+ over long periods. By not investing, you’re forfeiting the very tax free growth that makes HSAs so valuable.

Most hsa provider platforms offer investment options once you meet a minimum balance threshold—typically $1,000 to $2,000 in cash. Beyond that threshold, you can invest in mutual funds, ETFs, index funds, and target-date funds through a linked health savings brokerage account.

The strategy: maintain a modest cash buffer to cover your annual deductible or expected out of pocket costs, then invest everything else. This ensures you can handle a medical emergency without selling investments at an inopportune time.

Sample investment mixes based on time horizon:

Watch out for fees. High expense ratios and custodial fees can erode your tax savings over time. Aim for low-cost index funds with expense ratios under 0.20%, and consider switching to a lower-fee hsa provider if your current one charges excessive administrative fees. Investing involves risk, and your principal can lose value—but over long time horizons, staying in cash is often the bigger risk.

Pay Medical Expenses Out of Pocket When You Can

Here’s a counterintuitive approach that supercharges HSA wealth: instead of paying every medical bill from your HSA, pay out of pocket using regular cash flow or emergency savings. This allows your hsa investments to compound untouched, potentially for decades.

This strategy works for people with stable income and adequate emergency savings who can comfortably absorb routine health care expenses. We’re talking about the $50 prescription, the $200 urgent care visit, the $400 dental cleaning. These costs won’t break your budget, but they will interrupt your HSA’s compound growth if you withdraw for each one.

You’re not losing the tax benefit by paying out of pocket. That’s the key insight. You can reimburse yourself from your HSA at any point in the future—there’s no time limit. So you’re simply deferring the tax-free withdrawal while letting your money grow.

Consider this example: You have a $1,000 medical expense. If you pay it from your HSA today, you get the tax benefit now but lose future growth. If you pay out of pocket and let that $1,000 stay invested at 7% for 20 years, it grows to roughly $3,870. You can then reimburse yourself that original $1,000 tax-free two decades later, and the $2,870 in growth remains in your HSA, also available tax-free for future qualified medical costs.

The math gets even more compelling when you add up hundreds of small expenses over a career.

Use the “Shoebox Strategy” for Tax-Free Reimbursements Later

The shoebox strategy is simple in concept but powerful in execution: save receipts for all qualified out-of-pocket medical expenses incurred after your HSA is opened, then reimburse yourself years or decades later from your HSA, completely tax free.

The IRS does not impose a time limit between when an eligible expense is incurred and when you reimburse yourself. The only requirements are that (1) the HSA existed at the time of the expense, and (2) you have documentation proving the expense was qualified.

What to keep for each expense:

• Date of service

• Provider name and contact info

• Description of service or product

• Amount paid

• Proof of payment (credit card statement, canceled check, receipt)

Create a simple spreadsheet tracking date, provider, amount, and where the receipt is stored. Scan physical receipts and save them digitally—paper fades, but PDFs last forever. Many people use cloud storage folders organized by year.

Here’s the power of this approach: Imagine you accumulate $15,000 in saved receipts over 10-15 years—a combination of copays, prescriptions, dental work, glasses, and other qualified medical costs you paid from your checking account. In your 50s, you can make a one-time $15,000 tax-free reimbursement to fund a home down payment, pay off debt, or cover an unexpected expense—all without touching your retirement accounts or triggering any tax liability.

Note: Tax laws can change. Periodically confirm current IRS guidance on HSA reimbursements, and keep your documentation organized in case of an audit.

Let Your HSA Become a Retirement Asset

Healthcare is one of the largest expenses in retirement, with estimates suggesting a 65-year-old couple may need $300,000 or more for lifetime healthcare costs. Your HSA can directly address this challenge while functioning as part of your broader retirement savings strategy.

The age 65 rules are favorable. Withdrawals for qualified medical expenses remain completely tax free—no change there. But withdrawals for non-medical purposes lose only the 20% penalty, not the income tax treatment. After 65, non-medical HSA withdrawals are taxed as ordinary income, just like Traditional IRA or 401(k) distributions. This makes your HSA a flexible supplement to other retirement accounts.

Major retirement-eligible HSA uses:

• Medicare Part B and Part D premiums

• Medicare Advantage plan premiums

• Long-term care insurance premiums (within IRS age-based limits)

• Deductibles, copays, and coinsurance

• Dental and vision expenses

• Prescription medications

• Hearing aids, medical equipment, and more

Note: Medigap (Medicare Supplement) premiums are not considered qualified expenses.

Using your HSA to cover healthcare costs in retirement reduces pressure on your taxable, Roth, and traditional retirement accounts. Every dollar you withdraw tax-free from your HSA is a dollar you don’t have to pull from a 401(k) (which would be taxed as ordinary income rates) or a taxable brokerage account (which might trigger capital gains).

Consider this scenario: A retiree uses $10,000 per year from their HSA for Medicare premiums and out-of-pocket costs. That’s $10,000 they don’t withdraw from their 401(k). At a 22% federal tax rate, that’s $2,200 in annual tax savings—compounding over a 20-30 year retirement.

Age-Based HSA Playbooks

Your HSA investment strategy and spending approach should evolve as your income, health status, and time horizon change. What makes sense for a 25-year-old with minimal medical expenses is very different from what’s appropriate for a 58-year-old preparing for Medicare.

The following playbooks provide frameworks for four broad life stages. These are general guidelines—if you have chronic health conditions or consistently high annual expenses, you may need a larger cash buffer and a less aggressive allocation regardless of age.

What each playbook covers:

• 20s–Early 30s: Maximum growth, minimal cash, shoebox foundation

• Mid-30s–40s: Family considerations, balanced risk, larger buffer

• 50s: Catch-up contributions, pre-retirement focus

• 60s+: Medicare transition, withdrawal strategies, legacy planning

20s–Early 30s: Max Growth and Shoebox Strategy

Your 20s and early 30s are prime time for aggressive HSA investing. You likely have relatively low medical expenses, a long time horizon, and decades for compound growth to work its magic.

Focus on high equity allocations—80% to 100% in stock index funds. Your cash buffer can be minimal, perhaps just enough to cover your annual deductible. Since you’re unlikely to face major medical expenses, you can afford to stay fully invested and ride out market volatility.

Set up automatic contributions and auto-invest features so every dollar above your cash threshold is swept into your chosen investment portfolio. This removes the temptation to leave money sitting in cash and ensures consistent investing regardless of market conditions.

This is also the ideal time to start the shoebox strategy. Begin saving receipts for every eligible expense from the year your HSA is opened. Even small amounts add up over 30-40 years, creating a substantial “reimbursement bank” you can tap tax-free later in life.

Starting HSA investing early magnifies compounding dramatically. A 25-year-old contributing $200/month at 7% returns would have over $525,000 by age 65—mostly from growth, not contributions.

Mid-30s–40s: Family, Risk Balance, and Cash Buffer

These years often bring higher and less predictable healthcare expenses. Children mean pediatric visits, unexpected ER trips, orthodontics, and other costs that can strain a too-small cash buffer. Your HSA strategy should balance growth with accessibility.

Increase your cash buffer to cover at least the annual out-of-pocket maximum, or 1-2 years of expected routine expenses. This ensures you won’t have to sell hsa investments during a market downturn to cover an emergency appendectomy or broken arm.

Shift to a moderately aggressive investment mix: 60-80% equities and 20-40% bonds or stable value funds, depending on your risk tolerance. You still have 20-30 years until retirement, which is plenty of time for growth, but protecting against severe losses makes more sense now than it did in your 20s.

Continue paying smaller expenses out of pocket when feasible, reserving your HSA primarily for large, unexpected bills. Keep adding to your shoebox of reimbursable receipts—those accumulated receipts become increasingly valuable as they age.

Conduct an annual check-in to adjust contributions and allocation as your income, family size, and health status change.

50s: Catch-Up Contributions and Pre-Retirement Focus

Starting at age 55, you can make an additional $1,000 catch-up contribution each year. If you haven’t been maxing your HSA, now is the time to accelerate. This extra $1,000 annually for 10 years, invested at 6%, adds roughly $14,000 in additional HSA assets by age 65.

Many investors in their 50s shift to a slightly more conservative allocation: 50-70% equities, 30-50% bonds or short-term fixed income. You still want growth, but protecting your accumulated wealth becomes more important as retirement approaches.

Position your HSA as part of a broader pre-retirement strategy. Coordinate HSA contributions with 401(k)/IRA catch-up contributions, potential Roth conversions, and debt payoff. All these pieces work together to optimize your tax situation both now and in retirement.

Review your accumulated shoebox receipts. You might consider reimbursing some expenses tax-free to fund specific pre-retirement goals—paying off a mortgage early, funding a child’s wedding, or covering a gap year before Social Security kicks in. Balance this against maintaining a healthy HSA balance for future medical expenses.

Use retirement healthcare cost estimators from major providers to project your needs. If estimates suggest you’ll need $300,000+ for lifetime healthcare costs, aim for the largest HSA balance you can build.

60s+: Medicare, Withdrawals, and Legacy Planning

Once you enroll in Medicare (usually at 65), you can no longer contribute to an HSA. However, you can continue to invest the existing balance and withdraw funds for qualified expenses.

Common qualified expenses in this phase include:

• Medicare Part B premiums (automatically deducted from Social Security for most)

• Medicare Part D premiums

• Medicare Advantage plan premiums

• Long-term care insurance premiums (within age-based IRS limits)

• Deductibles, copays, and coinsurance

• Dental, vision, hearing expenses

Remember that non-medical withdrawals after 65 are taxed as ordinary income but carry no penalty. This gives you flexibility if your healthcare needs are lower than expected—you can withdraw funds for any purpose, paying income taxes but avoiding the 20% penalty that applies before 65.

Estate planning considerations:

• Naming your spouse as beneficiary allows the HSA to become their HSA, continuing all tax benefits

• Non-spouse beneficiaries (children, etc.) generally recognize the account value as taxable income in the year of inheritance

• If leaving a significant HSA balance, consider whether spending down the account for your own healthcare or passing assets through other vehicles makes more sense

Coordinate HSA withdrawal timing with Social Security, pension income, and RMDs from other retirement accounts to manage your overall tax bracket. Strategic sequencing of withdrawals across account types can save thousands in taxes over a multi-decade retirement.

Order of Operations: Where Your HSA Fits in a Wealth Plan

Your HSA shouldn’t exist in isolation—it’s one component of a comprehensive financial strategy that includes 401(k)s, IRAs, and taxable investment accounts.

Here’s a sensible priority sequence for most workers:

First, capture your full employer 401(k) match. This is free money—an immediate 50-100% return on your contribution depending on your employer’s formula. Never leave match dollars on the table.

Second, aim to max out your hsa contributions. The triple tax advantage often makes HSAs more valuable than additional pre-tax 401(k) contributions beyond the match, especially if you expect significant healthcare costs in retirement (and statistically, you will).

Third, increase your 401(k) or 403(b) savings toward the annual limit ($23,500 in 2025 for those under 50).

Fourth, consider Roth IRA contributions or taxable brokerage investing based on your tax situation, income level, and flexibility needs.

Why does the HSA often outrank extra 401(k) contributions beyond the match? Both offer upfront tax deductions, but HSAs add the possibility of completely tax-free distributions for medical costs. Since healthcare is essentially guaranteed in retirement, the HSA provides a tax-free bucket for an inevitable expense category.

Example scenario: A worker in the 24% federal bracket gets a 4% 401(k) match on their salary. They contribute enough to capture the full match, then fully fund their family HSA ($8,550 in 2025). With remaining savings capacity, they split between additional 401(k) deferrals and Roth IRA contributions, depending on whether they expect higher or lower tax rates in retirement.

This framework provides tax diversification across pre-tax, Roth, and HSA buckets—giving you flexibility to optimize withdrawals in retirement regardless of future tax rate changes.

Common Mistakes to Avoid with HSAs

Misusing an HSA can erode the very tax benefits that make it such a powerful wealth-building tool. Awareness of common pitfalls helps you avoid costly errors.

Leaving all funds in cash: This is the single most common mistake. Cash earns minimal interest (often under 1%) while investments have historically returned 7%+ over long periods. For long-term wealth building, invest the majority of your HSA balance.

Failing to maintain any cash buffer: The opposite extreme is also problematic. If you invest 100% and face an unexpected medical emergency, you might have to sell investments at a loss. Keep enough cash to cover your annual deductible or expected short term medical expenses.

Spending from the HSA for every minor expense: Using your HSA for every $25 copay and $15 prescription interrupts compound growth. If you can afford to pay out of pocket, consider the shoebox strategy instead.

Poor record-keeping for shoebox reimbursements: The strategy only works if you can prove the expenses were qualified. Lost receipts mean lost tax-free reimbursement potential.

Contributing while ineligible: Once you enroll in Medicare, you cannot contribute to an HSA. Contributing anyway triggers tax penalties and excess contribution issues that are annoying to unwind.

Using HSA for non-qualified expenses before 65: You’ll pay income taxes plus a 20% penalty. Unless you’re facing a genuine financial emergency, this should be an absolute last resort.

Ignoring high fees: Some HSA providers charge excessive custodial fees or offer only high-expense-ratio investment options. These fees compound against you over time, potentially costing thousands in lost growth. Switch providers if necessary.

Review your HSA usage annually to catch and correct these mistakes early. A few minutes of attention each year can prevent significant wealth erosion over decades.

Taxes, Documentation, and Compliance

Maximizing HSA tax benefits depends on following IRS rules carefully and maintaining good records. Sloppy documentation can turn a tax-free withdrawal into a taxable event if you’re audited.

Basic tax reporting:

Contributions made through payroll appear on your Form W-2 (Box 12, Code W). If you make after-tax contributions directly to your HSA, you’ll report them on Form 8889, which also tracks distributions and calculates your annual contribution limit. Your hsa provider sends Form 5498-SA showing contributions and Form 1099-SA showing distributions.

Documentation requirements for withdrawals:

For every HSA withdrawal, keep records that prove the expense was qualified:

• Invoice or explanation of benefits (EOB) from insurer

• Receipt showing amount paid

• Proof of payment (credit card statement, canceled check)

• Date of service

• Provider name

• Who received the care (you, spouse, or dependent)

The IRS doesn’t require you to submit documentation with your tax return, but you must have it available if audited. The statute of limitations generally runs three years from filing, but for shoebox reimbursements made years after the expense, you’ll want documentation for the entire period.

Important compliance notes:

• Expenses must be incurred after the HSA is opened to be eligible for reimbursement

• You cannot double-dip: don’t deduct a medical expense on Schedule A and also pay it tax-free from your HSA

• State taxation varies—consult a tax advisor if you live in California, New Jersey, or other states that tax HSA earnings

• IRA-to-HSA rollovers are allowed (once per lifetime, limited to annual contribution limit) but have specific rules

For complex situations—large backdated shoebox reimbursements, state-level taxation questions, or rollovers—consult a tax professional. The tax savings from an HSA are significant enough that getting professional legal or tax advice for unusual situations is money well spent.

Putting It All Together: Building Wealth with Your HSA

HSAs can be far more than spending accounts for current medical expenses. When funded consistently and invested wisely, they become powerful, tax-advantaged wealth and retirement tools that can add six figures to your net worth over a working career.

The key steps are straightforward:

1. Confirm your eligibility (HDHP enrolled, not on Medicare, not a dependent)

2. Open a low-fee HSA with good investment options

3. Automate and maximize contributions within 2025 limits ($4,300 self-only, $8,550 family, plus $1,000 catch-up if 55+)

4. Invest for long-term growth, maintaining only a reasonable cash buffer

5. Pay current medical expenses out of pocket when feasible

6. Use the shoebox strategy to bank future tax-free reimbursements

7. Let your HSA grow into a retirement healthcare fund

Review your HSA setup annually. Check that contributions are on track to hit the maximum, verify your investment allocation still matches your risk tolerance and time horizon, and update your shoebox spreadsheet with the year’s out-of-pocket expenses.

The disciplined use of an HSA from 2025 onward can materially increase your long-term net worth. Healthcare costs aren’t going away—they’re projected to consume an ever-larger share of retirement spending. Building a substantial, tax-advantaged pool of hsa money specifically for those costs is one of the smartest financial moves available.

If you haven’t already, consult a qualified financial professional or tax professional to integrate your HSA into a broader financial plan tailored to your income, age, health, and retirement goals. The triple tax advantage is too valuable to leave on the table.

Estate Planning: What Happens to Your HSA When You Die?

When planning for the future, it’s essential to consider what happens to your health savings account (HSA) after you pass away. Understanding the estate planning rules for HSAs can help you protect your loved ones and ensure your hsa funds are used as efficiently as possible.

If your spouse is the designated beneficiary:Your HSA is one of the few retirement accounts that allows a seamless transfer to a surviving spouse. If you name your spouse as the beneficiary, your health savings account hsa simply becomes their HSA upon your death. They can continue to use the funds for qualified medical expenses, enjoy tax free withdrawals, and benefit from the same triple tax advantage you did. This makes naming your spouse as beneficiary the most tax-efficient option.

If a non-spouse (such as a child or other heir) is the beneficiary:The rules change if your beneficiary is not your spouse. In this case, the HSA stops being a health savings account and the entire balance becomes taxable income to the beneficiary in the year you die. They’ll need to report the value of the HSA on their tax return and pay ordinary income tax on the amount. While this can create a tax bill, the funds are not subject to the 20% penalty for non-medical withdrawals.

If no beneficiary is named:If you don’t name a beneficiary, your HSA funds become part of your estate. The value of the account is included in your final tax return, and your estate will pay income taxes on the balance. This can be less favorable than naming an individual beneficiary, as it may push your estate into a higher tax bracket and reduce the amount passed on to your heirs.

Introduction to Health Savings Accounts

A Health Savings Account (HSA) is a powerful tool designed to help individuals with high deductible health plans (HDHPs) manage their medical expenses while building long-term savings. At its core, a health savings account hsa offers a unique triple tax advantage: you can contribute pre tax dollars, your investments grow tax free, and withdrawals for qualified medical expenses are also tax free. This combination makes HSAs one of the most tax-efficient ways to save for both current and future healthcare costs.

By contributing to an HSA, you immediately lower your taxable income, which can reduce the amount you pay in income taxes each year. The money you set aside can be used for a wide range of qualified medical expenses, from doctor visits and prescriptions to dental and vision care. Even if you don’t need to use your HSA funds right away, the account allows your savings to grow tax free over time, providing a valuable resource for future medical expenses or unexpected healthcare costs down the road.

For anyone enrolled in an HDHP, opening and funding an HSA is a smart move—not just for covering today’s medical bills, but for building a tax-advantaged nest egg that can help you manage healthcare costs for years to come.

HSA Benefits and Advantages

Health savings accounts offer a range of benefits that make them stand out among other savings and investment vehicles. One of the most significant advantages is the ability to make tax free withdrawals for qualified medical expenses, which can include everything from routine doctor visits and prescription medications to dental care and over the counter medications. This flexibility allows account holders to use their hsa funds for a broad spectrum of healthcare costs, both expected and unexpected.

Another key benefit is tax deferred growth. Any investment earnings within your HSA—whether from interest, dividends, or capital gains—are not subject to taxes as long as the funds remain in the account. This allows your savings to compound more efficiently over time. Unlike many retirement accounts, HSAs have no required minimum distributions, so you can keep your money invested and growing for as long as you want, giving you greater control over your financial planning.

HSAs are also fully portable, meaning you keep your account and all accumulated funds even if you change jobs, switch health plans, or retire. This makes them an excellent option for long-term healthcare savings. To make the most of these tax benefits and ensure you’re using your HSA in compliance with IRS rules, it’s wise to consult a tax advisor who can help you navigate the details and maximize your account’s potential.

Maximizing HSA Potential

To unlock the full potential of your health savings account, it’s important to take a proactive approach: contribute as much as you can, invest your hsa funds wisely, and keep meticulous records of your qualified medical expenses. Making regular hsa contributions—either through payroll deductions or direct deposits—ensures you’re taking advantage of the annual tax benefits and building a solid foundation for future healthcare costs.

Once your HSA balance reaches the minimum required by your provider, consider investing hsa funds in mutual funds or other investment options. This strategy allows your account to grow tax free, potentially increasing your savings significantly over time. A well-thought-out investment strategy, tailored to your risk tolerance and time horizon, can help you build a robust healthcare fund for the future.

It’s equally important to track all your qualified medical expenses, as these can be reimbursed from your HSA at any time, tax free. Keeping organized records ensures you can take advantage of tax free withdrawals whenever you need them, whether for current or future medical needs. Working with a financial advisor can help you develop an investment strategy that aligns with your goals, so your HSA funds are always working for you—growing tax free and ready to cover healthcare costs when you need them most.