A Health Savings Account (HSA) is a U.S. tax-advantaged savings account designed to help people cover current and future medical expenses. It’s available only to individuals enrolled in a High Deductible Health Plan (HDHP), and it offers triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
While often thought of as just a short-term tool for covering doctor visits or prescriptions, the HSA can serve a much broader role — especially in retirement planning. For those who don’t need to draw on the account immediately, it functions as a tax-efficient investment vehicle, with benefits that rival and in some cases exceed those of traditional and Roth retirement accounts.
Eligibility
To contribute to an HSA, you must meet the following conditions:
- Be enrolled in a qualified High Deductible Health Plan (HDHP)
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
- Not have other health coverage (with limited exceptions)
In 2025, the IRS defines an HDHP as a plan with a minimum deductible of $1,650 for individuals and $3,300 for families, and maximum out-of-pocket limits of $8,300 and $16,600 respectively.
Contribution limits
For 2025, the HSA contribution limits are:
- $4,150 for individuals
- $8,300 for families
- An additional $1,000 catch-up contribution for individuals aged 55 or older
Contributions can be made by the individual, an employer, or anyone else on behalf of the account holder. All contributions count toward the annual limit. Employer contributions are not taxable to the employee.
Triple tax advantage
The HSA is the only account in the U.S. tax code that offers a triple tax benefit:
- Tax-deductible contributions: Contributions reduce your taxable income, even if you don’t itemize deductions. Employer contributions are excluded from gross income.
- Tax-free growth: Interest and investment earnings inside the HSA are not taxed.
- Tax-free withdrawals: Funds used for qualified medical expenses are not taxed, regardless of when they’re withdrawn.
This combination makes the HSA more tax-efficient than both traditional and Roth IRAs, assuming the money is used for healthcare-related costs.
Qualified expenses
Qualified expenses include:
- Doctor visits
- Dental and vision care
- Prescriptions
- Medical devices
- Certain over-the-counter medications
- Long-term care premiums
- Medicare Part B, Part D and Medicare Advantage premiums (after age 65)
You can reimburse yourself for qualified expenses in any year, as long as the expense occurred after the HSA was opened. This creates a strategy where individuals pay out of pocket now, allow the HSA to grow tax-free, and withdraw years later — effectively converting medical receipts into tax-free income.
HSA vs FSA
Unlike a Flexible Spending Account (FSA), an HSA is owned by the individual, not the employer. Funds roll over indefinitely and are not subject to a “use it or lose it” rule. HSAs are portable — they stay with you even if you change jobs or insurance plans.
FSAs also have lower contribution limits and limited investment options. HSAs offer long-term value; FSAs are better suited for predictable, near-term medical expenses.
Investment capabilities
Many HSA providers allow you to invest funds once your balance reaches a certain threshold (often $1,000 or $2,000). Investment options are typically mutual funds or ETFs, similar to what’s available in an IRA or 401(k). Growth in these investments is tax-free if used for qualified expenses.
This makes the HSA a viable long-term investment vehicle. Savers can treat it as a “medical IRA,” growing a separate pot of money to cover healthcare costs later in life, including during retirement when medical expenses tend to increase.
Use in retirement
After age 65, HSA funds can be withdrawn for any reason without penalty. However, non-medical withdrawals are taxed as ordinary income — similar to a traditional IRA. Medical withdrawals remain tax-free.
In retirement, this flexibility becomes particularly useful. HSA funds can be used to:
- Pay for Medicare premiums
- Cover long-term care expenses
- Offset out-of-pocket healthcare costs
- Supplement retirement income (if used carefully)
Because HSAs are not subject to Required Minimum Distributions (RMDs), they offer planning flexibility — allowing retirees to draw down taxable accounts first and preserve tax-advantaged space.
Estate planning considerations
HSAs are not ideal inheritance vehicles. If passed to a spouse, the HSA becomes theirs and retains its tax benefits. If passed to a non-spouse, the account’s full value becomes taxable income in the year of the original account holder’s death.
For this reason, many high-net-worth individuals aim to spend down their HSAs during retirement or designate them for medical bequests.
Seen from Pension Gruber
Guests from the U.S. who planned well with HSAs often use them without thinking twice — covering dental visits abroad, eye exams, or pharmacy costs during their stay. The ones who used the HSA strictly as a cash buffer missed the opportunity to grow it as an investment. Others let the account sit idle, unaware it could be invested.
Those who treated it as a second retirement account — growing it intentionally and using other savings to cover day-to-day expenses — usually arrived with fewer worries about late-life healthcare costs.
The HSA doesn’t replace a pension. But for Americans who understand it, it covers a part of retirement most people overlook: the inevitable, expensive, medical part.
