You are probably familiar with health savings accounts (HSAs), which can be used to cover certain healthcare costs with pre-tax dollars. To contribute to an HSA, you must be enrolled in an HSA-eligible plan, also known as a High Deductible Health Plan (HDHP). These plans typically have lower monthly premiums but require you to cover more out-of-pocket expenses before your insurance kicks in.
You are not eligible to contribute to an HSA if you have Medicare or any health plan that covers costs before you meet deductibles or copayments. Additionally, in 2025, individuals must have an eligible healthcare plan with a minimum deductible of $1,650 ($3,300 for families).
Benefits of an HSA
- The money you contribute is tax deductible, which can lower your tax bill
- Pay no taxes on earnings (tax-free growth)
- Withdraw the money tax-free now or in retirement to pay for qualified medical expenses
- Get reimbursed tax-free for retirement expenses now or in the future (more on this later)
- Use the money you save for non-medical expenses after age 65 without any penalties
- Some employers make contributions to HSA accounts for participants
- Unlike traditional IRAs and 401(k)s requiring minimum distributions at age 73 (subject to taxes), HSAs have no mandatory withdrawals
Triple Tax Benefits
An HSA is the only investment vehicle I’m aware of that could provide triple tax benefits on your contributions, account growth, and when you take money out (i.e., distributions).
As you can see in the chart below, qualifying withdrawals and reimbursements from an HSA account qualify for three tax benefits compared to traditional retirement plans, which typically only provide two of the three listed tax benefits.
After taking full advantage of an employer match on your 401(k), contributions to an HSA could be the next best place to save for retirement medical and other expenses due to the potential triple tax benefits that HSAs can provide.
*Due to income restrictions, some investors may not be eligible to take deductions on Traditional IRA contributions or participate in a Roth IRA.
Using an HSA for Retirement Savings & Investment Strategy
HSAs can also be used as a powerful tool for retirement savings. If you have income or excess cash in the bank to pay for medical expenses out of pocket, you can leave money invested in HSA to let it grow. Investors using this strategy could potentially benefit from significant tax-free earnings.
Consider the following hypothetical scenario.
Your family deposits $6,000 into your HSA account annually and incurs $6k/year in medical expenses annually for the next 20 years. Instead of using your Health Savings Account contributions to fund your health care costs, you use your bank account to pay medical expenses. This allows the money in your HSA to grow tax-free.
Using a hypothetical 7% rate of return and funding $6k / year into your HSA account, your account grows to more than $263,000! That’s over $143,000 in potential tax-free gains that can be used for future qualifying medical and other expenses and for reimbursements.
In the above scenario, you put in $120k, so you could take out $120k in tax-free reimbursements for anything you want: vacations, gifts to loved ones, purchases of cars, paying off a mortgage, or whatever you can dream up.
Of course, it’s critical to keep the receipts and remember that HSA accounts can be invested. Investment returns are not guaranteed and may decrease in value.
To reimburse yourself tax-free, all you need to do is keep your receipts, which could potentially be a physical folder with printed receipts or an album or folder in the cloud.
In the above scenario, you spend $6,000 in medical expenses per year over the next 20 years ( $120,000 in total). If you don’t use your HSA to pay that $120k along the way, you can reimburse yourself at any time – even if you use that reimbursement to fund family vacations, purchase a car, or use it to pay off your mortgage in retirement.
When to Consider Using Your HSA as a Retirement Account
If you have an HSA plan or could enroll in one during annual enrollment, consider using your HSA as a retirement savings tool to cover future healthcare costs and retirement expenses through tax-free reimbursements.
One approach to maximizing the tax-free benefits HSAs can provide is to pay your current medical expenses out of pocket while preserving and growing your HSA value each year. Then, you can make tax-free qualifying withdrawals for future medical costs and reimbursements!
Additionally, after age 65, you can withdraw HSA funds for any reason without a penalty. These withdrawals would be taxed similarly to a pre-tax 401(k) plan. You simply pay income taxes on your withdrawals. So, if you are maxing out your company retirement plan and looking to save more money for retirement, an HSA could provide you with that opportunity.
HSAs often provide numerous investment options, which offer the ability to invest your funds for long-term growth—an opportunity many HSA holders overlook. Many HSA plans typically default your contributions to cash, so make sure to consider the investment choices in the plan—especially if you are considering investing your HSA funds over moderate to lengthy periods of time.
How to Maximize Your HSA Investment Strategy
Here are some strategies to consider:
- Contribute the Maximum Annually. Set aside as much as possible each year ($4,300 for individuals, $8,550 for families) to reduce your taxable income.
If you’re 55 or over, you can make a catch-up contribution of $1,000. If you’re married, your spouse can also make the $1,000 catch-up contribution if they have their own account.
- Invest Your HSA Balance. If you can cover current medical expenses out of pocket, consider investing your funds for long-term growth rather than letting them sit in cash.
- Let Your Savings Grow. Over time, your HSA balance could experience significant compound growth, which can help build a substantial healthcare fund for the future and additional funds for retirement expenses. Stay patient and committed to your investment strategy. With consistent saving, investing, and paying medical expenses out of pocket, HSA holders can potentially accumulate 2-3 times their annual high-deductible amount within a few years.
With their unique tax advantages, HSAs can be a powerful opportunity to strengthen retirement savings—both now and in the future.
At One Life Financial Group, we do your financial planning so you have the freedom to focus on what matters to you. If you’re interested in learning more about how we can work together to develop a plan to help you maximize your wealth, minimize your lifetime tax bill, and protect your time and money so that you have more for what matters to you, schedule a no-cost, 90-minute consultation.
A disclaimer for you: I’m not an accountant. I don’t give tax advice. At One Life Financial Group, we talk a lot about tax minimization strategies. So, please speak to your accountant before acting on any new strategy. If you are unsure how to minimize your tax bill this year or if you’re looking to create a plan to secure your future and need help getting started, we would love to connect with you.