HSA (Health Savings Account)
Definition
A triple tax-advantaged account for medical expenses: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.
The Health Savings Account is often called the best tax-advantaged account in the US because of its triple tax benefit: contributions reduce your taxable income, investments grow tax-free, and withdrawals for qualified medical expenses are completely tax-free. No other account type offers all three benefits.
To contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). For 2025, the minimum deductible is $1,650 for individual or $3,300 for family coverage. The contribution limits are $4,300 (individual) or $8,550 (family), with an additional $1,000 catch-up for those 55 and older.
The optimal HSA strategy for those who can afford it: contribute the maximum, invest the funds in index funds (not a savings account), pay current medical expenses out of pocket, and let the HSA grow tax-free for decades. After age 65, HSA withdrawals for any purpose are taxed like a traditional IRA (no penalty). For medical expenses, withdrawals remain tax-free at any age.
HSAs have several advantages over 401(k)s: no Required Minimum Distributions, no penalty for medical withdrawals at any age, employer contributions don't count toward the limit, and the account is yours even if you change jobs or health plans (you just can't make new contributions without an HDHP).
HSA funds can be used for a wide range of medical expenses: doctor visits, prescriptions, dental, vision, mental health, medical equipment, and even certain over-the-counter medications. Keeping receipts for medical expenses paid out of pocket allows you to reimburse yourself from the HSA years later, giving your investments more time to grow.
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Frequently Asked Questions
Should I invest my HSA or use it for current expenses?
If you can afford to pay medical expenses out of pocket, investing your HSA for long-term growth is optimal. The triple tax benefit makes an invested HSA potentially more valuable than a 401(k) or Roth IRA on a per-dollar basis. Keep receipts to reimburse yourself later.
What happens to my HSA if I leave my HDHP?
The HSA is yours permanently, regardless of your health plan or employment. You can still use existing funds for medical expenses and invest the balance. You just can't make new contributions without qualifying HDHP coverage.