Since health savings accounts (HSAs) were created more than 20 years ago, financial advisors have hailed these tax-advantaged accounts as smart tools for savvy consumers. But many people who could benefit from an HSA investment still don't know about them — or don't fully appreciate how they work.
As open enrollment season kicks into gear, employees tend to focus on their health insurance options (HMO? PPO?) and overlook HSAs. That's a mistake.
HSAs offer a rare treat: triple the tax benefits. When you put money into the account, it's tax-deductible (or pretax if your employer lets you make a contribution via payroll deduction). The money grows tax-free. And you don't pay tax on withdrawals, at any age, as long as you use the money for qualified medical expenses.
"Some suggest HSAs have quadruple tax advantages because when you make contributions through payroll deduction, you and your employer also avoid (FICA) payroll taxes," said Roy Ramthun, founder and president of HSA Consulting Services in Silver Spring, Md.
Unlike flexible spending accounts (FSAs) that are mostly use-it-or-lose-it every year, HSAs offer flexibility and portability.
The tax benefits can be combined with retirement savings growth if you invest the funds in your HSA. Check out IBD's complete list of the best HSA accounts for 2025.
Read Our Full Report On The Best HSAs for 2025. Plus, Investing Gains Clout With HSA Account Holders.
HSA Contribution Limits And Flexibility
"There's still some confusion between HSAs and FSAs," said Ramthun, who led the U.S. Treasury Department's implementation of HSAs in 2003. "More education is needed."
You can hold HSA funds indefinitely, change employers (or retire) and even open more than one HSA in your name as long as you don't exceed annual contribution limits. This year, those limits are $4,150 if you're covered just for yourself and $8,300 if you have family health care coverage. Those ages 55-plus can also make a $1,000 catch-up contribution. For 2025, the contribution limits rise $150 to $4,300 for individuals and $250 to $8,550 for families.
You must have a high-deductible health care plan to set up and contribute to an HSA. And you can't be a dependent on someone else's tax return or a Medicare enrollee.
Beyond the tax benefits of HSAs, advisors often highlight how these accounts can serve as an excellent long-term investment vehicle. If you can afford to pay out-of-pocket health care expenses on your own, then it can make sense to invest HSA funds in a diversified portfolio and let it grow over time.
Don't Miss Out On Tax-Free Growth
Yet less than 10% of HSA holders invest their funds, Ramthun says. Instead, they withdraw the money regularly to pay for qualified medical expenses.
As a result, they never build a sizable balance in their HSA. They still gain some tax benefits, but they lose out on tax-free growth over time.
"About 50% (of people with HSAs) have less than $500 in their account," Ramthun said. Investing that money isn't an option for them, especially if their HSA custodian requires a minimum cash balance of, say, $1,000 before allowing them to start investing.
Don't expect to earn much interest on your HSA cash, at least in the current environment. Most HSA custodians are paying paltry interest, typically under 1%, on cash. And monthly account fees might exceed the minimal interest paid, leaving account holders with slowly eroding cash balances.
HSA Investment For Long-Term Growth
For those with enough money to invest HSA funds, the benefits accrue. Some accounts offer access to wide-ranging opportunities for an HSA investment, including ETFs, that provide instant diversification. Other HSAs offer a brokerage option, allowing holders to invest in stocks. Some also have covered call options and money funds as well as real estate, private loans and precious metals.
"High-income earners, healthy individuals with fewer current medical expenses and those looking for tax-efficient retirement strategies are often best positioned to benefit from HSAs," said Melissa Caro, a New York-based certified financial planner. "To maximize returns, account holders should consider investing their HSA contributions in low-cost, diversified funds and use other savings for current health care expenses when possible."
Creating an HSA that covers health care expenses and then using other money outside the HSA to pay for health care may seem counterintuitive. But it's actually smart.
"It takes mental training to do that," Caro said. "It's realizing it's such an attractive retirement account if you let it run and take advantage of the growth aspect" over many years without spending it.
By investing your HSA funds and letting the money grow, you can retire with an added layer of financial security. Unlike an IRA or 401(k), there is no mandatory distribution requirement with an HSA, Caro adds. So you can let the investment keep growing well into your 70s and beyond.
HSA Investment: Creating A Tax-Free Retirement Expense Account
"Maxing it out year after year and investing will create a valuable tax-free retirement medical expense account," said Jim White, a certified financial planner in Pottstown, Pa. "I tell folks to contribute to their 401(k) up to their employer match, then max out their HSA and then max out their 401(k) if they still have the money. HSAs are that beneficial."
Before recommending that clients max out on HSA contributions and invest the money, White confirms that they have enough cash on hand to cover unforeseen medical expenses in the near future.
"If you might need the funds somewhat soon, being aggressive with your HSA investments is not a good idea," White said. "But if you won't need to tap into it for five or seven years, a good diversified index stock fund is the way to go."
Save Medical Receipts Now, Reap Tax-Free Withdrawals Later
For advisors with wealthy clients, the real challenge can be convincing them to embrace HSAs. After all, the annual contribution limits mean that even if you deposit the maximum allowable amount every year, invest it wisely and leave it alone for decades, it still may not represent a sizable chunk of your net worth.
"It's like a traditional IRA and a Roth IRA had a baby, and the HSA inherited all the best features," joked Brandon Gibson, a Dallas-based certified financial planner. "But at least initially, some of my clients think it's too small an amount, that it's not worth the hassle."
Gibson persuades high-net-worth clients to capitalize on HSAs by proposing a long-term, save-your-medical-receipts strategy.
He encourages them to pay for medical care from a separate savings account while "keeping meticulous records of all your medical expenses over time — co-pays, prescriptions, dental work, everything," he said. "Then 20 years later, you want to buy a boat. So you take a tax-free HSA withdrawal as long as it's supported by your receipts for qualified medical expenses in past years."
HSA funds can be used for long-term care including premium payments, as well as Medicare Part B and D premiums and other health care services.
Those who are self-employed also can use HSAs. "If you're on your own, you can shop for the HSA custodian you like most," Gibson said. "Look for the lowest fees, the best menu of investment options and good technology."
