HSA: The Triple Tax-Advantaged Account You're Underusing

The Health Savings Account has a marketing problem. Its name makes it sound like a place to park money for medical bills. But used strategically, the HSA is the most tax-advantaged account in existence, better than a 401(k), better than a Roth IRA, better than anything else available to individual investors.

The Triple Tax Advantage

No other account offers all three of these benefits:

A 401(k) gives you #1 and #2 but taxes withdrawals. A Roth IRA gives you #2 and #3 but contributions aren't deductible. Only the HSA gives you all three, if you use it correctly.

Eligibility Requirements

To contribute to an HSA, you must:

• Be enrolled in a High-Deductible Health Plan (HDHP)
• Not be enrolled in Medicare
• Not be claimed as a dependent on someone else's tax return
• Have no other health coverage (with some exceptions)

2025 HDHP requirements: Minimum deductible of $1,650 (individual) or $3,300 (family). Maximum out-of-pocket of $8,300 (individual) or $16,600 (family).

2025 HSA contribution limits: $4,300 (individual) or $8,550 (family), plus $1,000 catch-up if 55+.

The Optimal HSA Strategy

Most people use their HSA wrong. They contribute, then immediately spend it on medical expenses. This wastes the account's greatest power: decades of tax-free compound growth.

The better approach:

1. Max out your HSA contributions every year
2. Pay medical expenses out of pocket (if you can afford to)
3. Invest the HSA balance in low-cost index funds
4. Save your medical receipts
5. Let it grow for decades
6. Reimburse yourself in retirement, tax-free

The Receipt Strategy

Here's the secret: there's no time limit on reimbursement. You can pay a medical bill in 2025, save the receipt, and reimburse yourself from your HSA in 2045, tax-free, after 20 years of tax-free growth.

Implementation:

• Create a folder (digital or physical) for medical receipts
• Save every qualified medical expense receipt
• Track the running total of unreimbursed expenses
• In retirement, withdraw from HSA up to your total receipts, tax-free

This effectively gives you a tax-free withdrawal option equal to your lifetime medical expenses.

What Counts as Qualified Medical Expenses?

The list is broader than you might think:

• Doctor visits, hospital stays, surgery
• Prescription medications
• Dental work (including orthodontics)
• Vision care (glasses, contacts, LASIK)
• Mental health services
• Long-term care premiums (up to limits)
• Medicare premiums (after 65)
• Medical equipment (CPAP, wheelchair, etc.)

Not qualified: Cosmetic procedures, gym memberships (usually), over-the-counter drugs without prescription (changed by CARES Act. OTC now generally qualifies).

HSA vs. FSA: Know the Difference

Don't confuse the HSA with its lesser cousin, the Flexible Spending Account (FSA):

HSA advantages:

• No "use it or lose it". Funds roll over indefinitely
• You own it. Portable when you change jobs
• Can be invested for growth
• No deadline for reimbursement

FSAs require you to spend the money within the plan year (with limited rollover or grace periods). HSAs are yours forever.

After Age 65

At 65, your HSA becomes even more flexible:

• Withdrawals for non-medical expenses are no longer penalized (though they're taxed as income, like a traditional IRA)
• You can use HSA funds for Medicare premiums (Parts B, D, and Medicare Advantage, not Medigap)
• Long-term care insurance premiums are qualified expenses up to age-based limits

The HSA essentially becomes a super-IRA after 65: use it tax-free for medical expenses (which will be substantial in retirement), or use it like a traditional IRA for anything else.

Investment Strategy

Don't let your HSA sit in cash (beyond a small emergency buffer). Invest it like any long-term account:

• Low-cost total market index funds
• Asset allocation appropriate for your timeline
• Consider it part of your overall portfolio

If your employer's HSA provider has poor investment options, you can often transfer to a better provider (like Fidelity) annually while keeping minimum required balance with employer's provider.