When you hear people talk about retirement, you’ll often hear about two different investment vehicles: an IRA and a 401k. But there’s another big one that is often overlooked: a Health Savings Account.

Here I will define an HSA and its eligibility requirements, discuss its advantages and disadvantages, and provide information on how to get started with an account.

HSA Overview

What is a Health Savings Account?

An HSA is an account designed to pay for medical costs. You can use it to pay for deductibles, copays, coinsurance, prescriptions, and some other expenses.

Unlike a Flexible Spending Account (FSA), which is also used for healthcare costs, your HSA funds do not expire and instead carry over year-to-year. And you can invest your funds just like you would in any other investment account. This makes it a great option for saving for retirement.

In the end, it doesn’t have to be just for medical expenses. I’ll talk more on that later.

Who is eligible for an HSA?

There are several requirements you must meet to open or contribute to an HSA. You will qualify for an HSA if all of the following statements are true:

1. You are 18 years or older.
2. You are covered under a qualifying high deductible health plan (HDHP). In 2025 this means your yearly deductible is at least $1,650 for an individual or $3,300 for a family plan.
3. No other person claims you as an independent on their tax return.
4. You are not covered by any other health plan (such as your spouse’s) that is not an HDHP.
5. You are not covered by any other healthcare benefit account such as a Healthcare Flexible Spending Account (FSA) or Healthcare Reimbursement Account (HRA).
6. You are not covered by Medicare.

The biggest thing here is probably #2. If you have a low deductible, then unfortunately you can’t contribute to an HSA. So if that’s you and you’re looking for Health Savings, then a Flexible Spending Account may be your best bet. If you’re looking to save more for retirement, make sure you’re investing in an IRA or 401k.

How much can you contribute?

The 2025 IRS contribution limits for an HSA are $4,300 for an individual and $8,550 for a family. If you are over 55, you are allowed a catch-up contribution of an additional $1000.

These limits are noticeably lower than some of the other accounts, such as an IRA or 401k. But $3550 per year is no forgettable amount, especially when it has the ability to grow and compound over time.

Benefits of an HSA

1. Triple-tax advantage on Medical Expenses

The HSA is the only investment account that offers a triple tax advantage. This means no taxes on contributions, no taxes on earnings, and no taxes upon withdrawal. Of course, this only applies when the funds are used for qualified medical expenses. But hospital bills are expensive and inevitable to an extent, so this is a pretty great deal! This is one of the best ways to pay for medical expenses, hands down.

2. Double Tax Advantage on Non-medical Expenses

What if you contribute a bunch of money to your HSA but then find you don’t need it for medical expenses?

If you withdraw the funds before you turn 65 then you will incur an IRS penalty. But after that, no penalty, even if you don’t use the funds for medical expenses. You will still have to pay taxes on the withdrawal if it’s not for medical purposes, but that’s it.

Not so bad. Essentially if you don’t end up using your money for medical costs, your accounts function like an IRA or 401k, you just have to wait until you are 65 instead of 59 ½.

3. Flexibility on Reimbursement for Expenses

When you incur a medical expense you generally have two options for how to use your HSA funds. Some accounts have a debit card that you can use to pay for your expenses directly from your HSA balance. If that’s not an option for you or if you don’t want to do that, you can always pay your medical bill with cash upfront, then submit a claim for reimbursement later.

But one little quirk that comes with an HSA is that there is no time restriction on when you submit a claim for reimbursement. This means in theory you could have a medical expense in 2025 and then submit for reimbursement in 2060.

Maybe that sounds ridiculous at first but it actually could be a pretty good idea. If you have a $1000 medical expense now, you could withdraw $1000 from your HSA now if you wanted. Or you could let it sit there and continue to grow tax-free for the next 40 years! Or however long you want. And you’ll always have the option to take out that $1000 if you ever need it.

Mathematically, the let-it-sit strategy makes sense. But there are a couple potential drawbacks. First, it means you have to not need the $1000 today. If you don’t have enough cash to allow for a short-term $1000 setback, then obviously this won’t work.

In addition, withdrawing your funds requires a medical receipt to prove that the money was used for medical purposes. This could be a little bit of a hassle to save the receipts over such a long period of time. But in today’s digital age it’s probably easier than ever before.

All in all, the flexibility in when you can submit a claim for reimbursement is a pretty great advantage to having an HSA, as you can grow some serious cash.

4. Potential for Employer Contributions

Many employers contribute to your HSA if you choose one of their high deductible health plans. This means free money right into your account.

So if your employer offers an HDHP with HSA contributions and you have pretty low medical expenses right now, this seems like a no-brainer. Open that HSA, let your employer contribute money at no cost to you, and you can sit there and watch it grow over time. Just make sure you set up your account and select the investment options that work best for you.

5. The best way to Save for Medical Expenses in Retirement

High medical costs are somewhat of a given upon retirement. You’ll be old, your health will decline, and you’ll be going to the doctor more often. And you won’t have your employer to share the premiums and other expenses with. Better save up.

Because of the triple tax advantage, an HSA is easily the best way to save for medical expenses in retirement. It means if your money goes to medical events - no taxes.

And because of the double-tax advantage on non-medical expenses, there’s no worry if you save and don’t end up needing it all. After you turn 65 just take it out and use it as you would your money from an IRA or 401k.

Pretty sweet.

Disadvantages of an HSA

1. Limited Investment Options

If you get your health insurance and HSA through your employer, then they will probably have a specified company to manage your money and investments. And sometimes, the list of investments they have may not be all that extensive and won’t have the type of fund you’re looking for.

This doesn’t apply if you open your own HSA. You’ll have access to pretty much anything you want and can choose something that suits your needs. Generally this means the younger you are, the stronger your preference for stocks over bonds.

2. There can be fees

Sometimes there are fees associated with an HSA. Some charge monthly fees just to have an account. Others charge fees per transaction made.

Often if your account is through your employer then your employer will take care of these fees for you.

If you're opening an account on your own, then you'll have to pay the applicable fees yourself. But since it's you on your own, you have the freedom to choose a provider with little or no fees.

If you’re looking for an individual or family account with virtually no fees, check out my review of the best HSA providers. They have the lowest fees out there and a diverse range of investment selections.

Alright, how do I get started?

You’ve heard the advantages and disadvantages, and for the most part, as long as you qualify, the advantages seem to outweigh the disadvantages. An HSA is a fantastic way to save for medical expenses and for retirement. So now let’s get started and open that account:

1. Make sure you are enrolled in a high deductible health plan and meet all other eligibility requirements.
2. Check to see if your employer offers an HSA and if so, see if they contribute any amount to your account.
3. If your employer provides your HSA, and you would like to use their provider, then obtain information on the account so you can log in and manage activity. If your employer doesn't provide your HSA, you need to choose a provider and open an individual account.
4. Choose an amount you’d like to keep in your cash balance if you plan to use it for sporadic medical expenses. If you can afford it and your account allows it, it may be better to keep nothing in cash and instead invest your entire HSA balance.
5. Now it’s time to select the funds you'd like to invest in. Make your selections, and consider meeting the IRS maximum of $4300 for an individual. Since your eligibility for contributing to an HSA may change down the road, it doesn’t hurt to put in the maximum now.
6. Keep contributing year after year and watch your money grow!

That’s it! An HSA can be a truly amazing investment vehicle for building retirement savings. So why wait to get started?