Health Savings Accounts (HSAs) are often referred to as a “triple tax advantaged” type of account. The HSA benefits from tax-deductible contributions, tax-free growth on investments, and tax-free withdrawals for qualified medical expenses. In short, the contributions lower taxable income, even if the money is invested and then spent on qualified expenses. If the money goes in and comes out for medical expenses, it essentially makes those medical expenses cheaper than if they had been paid for out of a normal checking account. The savings is the tax rate (12%, 22%, 24%, 32%, etc.) on medical expenses and is a great way to offset medical inflation, which continues to be one of the harsher inflation categories.
To be eligible to use an HSA the participant must be enrolled in what is called a High Deducible Health Plan (HDHP). Many employers offer HSA/High-Deductible Health Plans; however, individuals will want to review to see if that type of plan makes sense on a household medical basis. We don’t recommend choosing the HSA first, we recommend evaluating medical needs and then weighing the pros and cons of different plans. If it is determined to be a good fit, the HSA is very similar to an IRA with special distribution rules for qualified medical expenses. At age 65, owners can distribute the HSA for non-medical expenses without penalty, however under current law participants may want to keep the assets in the HSA as long as possible. For 2026 the HSA contribution limit is $4,400 for Individual coverage and $8,750 for Family coverage; there is an additional $1,000 contribution for those Age 55 or over. Retirees cannot contribute to an HSA once enrolled in any part of Medicare, however, they can still use HSA distributions to reimburse themselves for Medicare premiums in addition to using it for other out-of-pocket medical expenses. An HSA cannot be used to pay for Medigap premiums, as they don’t meet the IRS definition of qualified medical expenses.
The current trend of increased use of HSAs is growing, as is the amount of underlying assets invested in HSAs. However, most data show many people are contributing less than the maximum amount allowed, distribute funds at a high rate early in the account life, and are unlikely to use the investment options. The good news is that the ability to use the investment option is gaining steam. HSA is really two sub-accounts; a checking portion, which is where most people leave their contributions and a sub-account, that is the investment option. The investment sub-account is the piece that is underutilized. It allows HSA owners to select investments to try and keep pace with, or exceed, medical inflation. So, it’s a balance of having enough in the checking for the participant’s annual needs and investing the portion that can be deferred for long-term medical expenses and/or to supplement retirement funding once the owner reaches age 65.
The HSA had previously been limited to checking and often felt much more like a bank account. They have changed quite a bit in the past few years and now many providers work with investment custodians, like Charles Schwab. For example, Schwab currently works with three different large HSA providers and accounts can now be transferred between different custodians much like IRAs or other investment accounts. In short, the HSA has quickly broadened its flexibility and investment capability.
Many HSA owners may want to consider using the investment option to keep up with inflation but may also want to be aware that every state has its own rules for the HSAs, which can impact the reporting of gains on federal and state tax returns. These are also eligible advisory accounts, which can be included in a broader financial planning and investment advisory relationship designed to reflect an individual’s or family’s short-term and long-term financial goals and needs.