Are Health Savings Accounts the Most Underrated Investment Account?

When people think about investing, they typically focus on 401(k)s, IRAs, and brokerage accounts. Those accounts matter, but one of the most overlooked tools can be a Health Savings Account, or HSA. In fact, I often tell my clients that HSAs are the most tax-advantaged account available. No other account offers a quadruple-tax advantage, which we’ll explore further throughout this article. 

Healthcare is one of the biggest expenses many people face later during retirement. Even if you stay relatively healthy, most retirees still deal with insurance premiums, prescriptions, dental work, vision care, and unexpected medical costs. Planning ahead for those expenses can make a major difference.

If you qualify, an HSA can help you reduce taxes today, build savings over time, and create a dedicated pool of money for future healthcare costs. In some cases, it can even function like an extra retirement account.

What Is an HSA?

A Health Savings Account is a tax-advantaged account available to people enrolled in an HSA-eligible high-deductible health plan (HDHP).

You can contribute money to the account, invest it in many cases, and use it for qualified medical expenses.

Unlike an FSA (Flexible Spending Account), HSA money does not expire at year-end. If you don’t use it, it stays with you and can continue growing. It is also portable, meaning the account is yours even if you change employers.

Why HSAs Can Be So Powerful

HSAs are unique because they can offer a quadruple tax advantage:

1. Tax benefits when you contribute: Contributions are always federal and state-tax deductible. 
2. Tax-deferred growth: If invested, earnings can grow without annual taxation.
3. Tax-free withdrawals for qualified medical expenses: If used for eligible expenses, distributions are generally tax-free.
4. Potentially payroll-tax free: HSAs are the ONLY account that can allow you to avoid payroll taxes (7.65%) if contributed through payroll deductions (if you contribute directly to your HSA outside of your employer’s plan, you do not get this benefit).

Very few accounts offer all these benefits together.

2026 HSA Contribution Limits

For 2026, the IRS limits are:

Contribution limits

• Individual coverage: $4,400
• Family coverage: $8,750
• Age 55+ catch-up contribution*: $1,000 additional

To be HSA-eligible, your plan must also meet these IRS thresholds:

Minimum deductible

• Individual: $1,650
• Family: $3,300
  

Maximum out-of-pocket limits

• Individual: $8,300
• Family: $16,600

*If you are age 55 or older, you may contribute the additional catch-up amount. If spouses both want catch-up contributions, each spouse generally needs their own HSA.'

HSAs At-A-Glance

How to Get Started:

1. Confirm you’re enrolled in an HSA-eligible health plan (HDHP) – see annual limit and requirements above. 
2. Open an HSA through your employer. If you’re not going through your employer, open with an HSA provider (many custodians, including Fidelity and Schwab, offer low-cost investment options)
3. Contribute through payroll deductions, or directly transfer into your account. 
4. Once your balance reaches the minimum investment threshold (which varies by provider), invest the funds rather than leaving them in cash

How HSAs Can Fit Into Retirement Planning

Many people use an HSA simply to cover current doctor visits or prescriptions. That can be helpful, but if you can afford to pay current medical costs out of pocket and leave the HSA invested, the long-term opportunity can be much more significant.

Over time, you may build a dedicated account specifically for future healthcare needs in retirement.

That can be valuable because healthcare costs often rise later in life, right when many people are trying to preserve the rest of their portfolio.

What Can HSAs Be Used For?

HSAs can typically be used for a wide range of qualified medical expenses, including:

• Doctor visits
• Prescriptions
• Dental care
• Vision care
• Hearing aids
• Certain long-term care costs
• Medicare Part B and Part D premiums in retirement

Be aware that rules change, and individual situations vary, so it’s worth reviewing current IRS guidance before withdrawing funds.

What Happens After Age 65?

After age 65, HSAs become even more flexible.

If funds are used for qualified medical expenses, withdrawals are generally tax-free.

If funds are used for non-medical expenses after age 65, withdrawals are usually taxable as ordinary income, but the penalty no longer applies.

That means an HSA is essentially the same as a traditional IRA during retirement, while still maintaining better tax treatment when used for healthcare.

Why Many People Underutilize HSAs

HSAs are often ignored because:

• They sound like a healthcare account, not an investment tool
• People assume they should spend it immediately (especially because they’re often confused with FSAs that must be spent or the money is lost)
• They don’t realize unused balances carry forward 
• They focus only on 401(k) matching and Roth IRAs (but many employers also offer an HSA match or employer contribution!)

But for the right household, an HSA can become one of the most efficient accounts available.

Common Mistakes to Avoid

1. Not investing the balance: Most HSA providers allow investing after a cash threshold is met (this is often $1,000 or $2,000, but some providers don’t have a cash minimum at all).
2. Spending it too quickly without a strategy: Sometimes using cash flow now and preserving the HSA for later can be more beneficial.
3. Ignoring fees or poor investment options: Not all HSA custodians are equal.
4. Missing contribution opportunities: Many people underfund the account each year.
5. Assuming every high-deductible plan qualifies: Not all plans are HSA-eligible (see rules above).

Final Thoughts

HSAs are very powerful tools with many advantages, but they are not always automatically the best move for everyone.

It might be best for your situation if cash flow is tight and the high deductible would create financial stress, forcing an HSA strategy may not make sense. It also might not be ideal if you have high expected medical costs that calendar year. 

But if you can comfortably handle the plan design and have room to save, an HSA can be one of the smartest accounts to prioritize. They are often particularly helpful if you are young and healthy and have low medical expenses overall. 

If you have access to an HSA plan at work, it is likely worth looking into the details of your plan compared to your other options. 

Want to know if you’re missing opportunities like this in your own finances? 

Book a complimentary consultation today.