What Is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is one of the most powerful (and overlooked) financial tools and investment vehicles out there. It’s not just about covering medical bills, it’s also a smart way to invest and even save for your future retirement.

Here’s the magic of an HSA:

• Pre-tax contributions (lowers your taxable income today)

• Tax-free growth (your investments compound without being taxed)

• Tax-free withdrawals (as long as it’s for qualified medical expenses)

That’s what’s called the triple tax advantage, and no other account offers it.

Who Can Contribute to an HSA?

Not everyone qualifies, and that’s where people get tripped up. To be eligible:

• You need to be enrolled in a high deductible health plan (HDHP) or what the IRS deems to be a high deductible health plan. 

• You can’t be enrolled in Medicare or another health plan outside your HDHP.

• There are no income limits (a huge perk compared to Roth IRAs).

How Does an HSA Work?

Think of it like a retirement account meets a checking account for health. You put money in pre-tax, invest it, and then use it tax-free for qualified medical costs.

But here’s where people make mistakes: many just let the money sit in cash or only use it for small expenses like co-pays or prescriptions. They are missing the point and a significant opportunity to grow their wealth over time. 

Instead, you could:

• Invest those dollars and let compounding work in your favor for years to come.
  
• Save the HSA for bigger medical expenses down the road (surgeries, retirement healthcare, etc.) as the expectation is for medical expenses to increase over time – not decrease.
  
• Treat it as a secondary retirement account. After age 65, you are able to withdraw the funds from the account for non-medical expenses penalty free but will be required to pay income tax on the distributions (because don’t forget, you never paid tax on the funds). 

Keep in mind, as many get this confused, your HSA is yours and yours to keep. If you leave a firm, you have the option to leave it where it is, roll it over into a private HSA account for you to manage, or roll it over into a new account with your new employer.

What Counts as a High Deductible Health Plan (HDHP)?

An HDHP usually comes with:

• Lower monthly premiums (cheaper insurance upfront).
  

• Higher deductibles and out-of-pocket costs (you take on more risk if something happens then you’ll be fronting the bill for a lot of it at first). 

So, HSAs work best if you’re generally healthy, don’t visit the doctor constantly, and like the idea of balancing lower premiums with long term tax benefits.

Who Benefits the Most From an HSA?

An HSA isn’t for everyone, but here’s who wins big:

High Deductible Plans are typically most appropriate for those who are in good health, not expecting large medical bills and do not make frequent trips to the Doctors. In addition, it makes sense for those who are willing to take on the higher risk in assuming their medical costs will be predictably low in the coming year.

Individuals with significant wealth are also good candidates for the high deductible plans & HSA combo. They will be able to reduce their taxable income by maxing out their HSA, benefit from the tax free growth of funds, and meanwhile have the means to afford out of pocket medical costs should they arise.

In my opinion, both high net worth individuals and individuals who are in their 20’s and 30’s, in good health and without children would be ideal candidates for the high deductible plan in combination with contributing to an HSA.

The #1 Mistake I See With HSAs

People contribute but never invest the money. Instead, they use it for small, routine costs. That’s fine, but here’s the opportunity you’re missing:

If you pay for those little expenses out of pocket (using cash or a regular debit card), you can leave your HSA money invested. Over decades, that could add up to tens (or hundreds) of thousands of dollars in tax free growth.

And if your employer offers an HSA match? That’s free money. Don’t leave it on the table.

The 2 Ways To Think About Using an HSA for Your Future

Short Term Strategy: Use it like a tax-free medical fund. Pay for prescriptions, doctor visits, therapy sessions, dental bills, etc.

Long Term Strategy: Invest your contributions, let compounding do its thing, and use it for major medical expenses later—or as retirement savings after 65.

Pro tip: you can also use HSA funds for your dependents’ medical expenses if you claim them on your taxes (think kids, even if they’re not on your insurance plan).

HSAs as Retirement Savings

Here’s the kicker: if you’re lucky enough to not need much for healthcare in your future, your HSA can essentially turn into a second retirement account.

At 65+:

• Withdraw for non-medical expenses penalty-free (just pay income tax, like a traditional IRA).
  
• Still use it tax-free for medical costs—which, let’s be real, only go up as we age.

Don’t Forget Beneficiaries

If you’re married, name your spouse as your HSA beneficiary. They inherit the account and keep all its tax perks. If it goes to anyone else, it becomes taxable in the year of your death.

Bottom Line: Should You Max Out Your HSA?

If you qualify for an HSA, it’s one of the most powerful wealth building tools out there. It’s not just a health fund, it’s an investment vehicle with tax FREE growth opportunities. Win win. 

So whether you use it for future surgeries, braces for your kids, or as a retirement boost, don’t sleep on your HSA.

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Want more tax-smart strategies? Check out my other posts on 529 College Savings Plans & Roth IRAs!