The HSA is STILL the Most Powerful Investment Account (2026 Edition)

Health expenses continue to be one of the single biggest expenses that seniors routinely face. According to KFF, “Medicare Part B and D premiums and cost sharing account for one-fourth of average Social Security benefits, not taking into account other health care expenses, such as dental services, home care, or care in a nursing home, or premiums for supplemental coverage” (Ochieng et al., 2025). This dynamic gets further exacerbated by the triggering of Income-Related Monthly Adjustment Amount, or IRMAA, which increases those premiums further if you earn beyond various dollar thresholds. All of these costs can erode your wealth and threaten your financial independence and personal freedom during your retirement years.

The good news is that we do have a means to prepare and save in advance in a way that can provide extra resources during retirement while also offering major tax advantages and flexibility as to how funds are used both during accumulating assets and spending them during retirement. This is done through contributing to a health savings account, or HSA.

On a basic level, an HSA is an account where you can deposit funds to be used later on to reimburse yourself for qualifying health care expenses. Deposits into the account are made on a pre-tax basis, and withdrawals from the account are tax-exempt when they are used to reimburse for qualifying medical expenses. That double-tax benefit on both pre- and post-tax treatment is unique to any other savings opportunity, making it the most powerful savings vehicle available.

Additionally, you are allowed to hold investments in your HSA, allowing your money to potentially compound and grow over years if not decades. The growth of those investments is ALSO tax-free, assuming that you use the funds for qualifying medical expenses. This is where HSA’s can really shine, where your savings can keep up with and/or exceed the inflation rate of health care expenses.

HSA contributions do have some restrictions that limit both how much can be contributed and who can fund an HSA.

• You must be in a qualifying high-deductible health care plan (HDHP). A product of the OBBBA tax legislation in 2025 is that all Bronze-level plans and catastrophic insurance plans automatically qualify for treatment as a HDHP. 
• You are limited each year in how much you can contribute. If you have self-only qualifying coverage, you may contribute $4,400 in 2026. If you have family coverage, you may contribute $8,750 in 2026. If you are age 55 or older and are not enrolled in Medicare, you may contribute an additional $1,000/yr. 
• There is NO restriction to contribute based on income, so high income earners can also take advantage of contributing to an HSA.

Moreover, while many employers offer HSA’s as part of their employee benefits, you are not required to use their provider. However, if you choose to contribute outside of your employer’s HSA offering, you may have to pay FICA taxes on those funds. By the same token, if the employer’s HSA does not offer investment options, or if those options are not particularly good, it may still benefit you to contribute outside of the employer’s plan. We strongly encourage consulting with a financial planner and/or tax professional for recommendations relative to your individual circumstances.

With respect to withdrawing funds from your HSA, obviously if you withdraw funds from the account for health care expenses incurred, you won’t pay taxes on that amount. But there are a few additional wrinkles to be aware of that can be rather advantageous as well – or costly if you are not careful.

• You can only reimburse yourself for expenses incurred after the HSA was opened, but you do NOT have to reimburse yourself in the year those expenses took place. You can save your receipts, allow the value of the account to compound over time, and years later reimburse yourself on a tax-free basis.
• Withdrawals for medical expenses are not considered income at all, so later on when you use your HSA to pay for medical expenses, you are not contributing toward hitting higher IRMAA limits, costing you more in health care premiums.
• Additionally, if you save those receipts and later find yourself in a financial bind, you can reimburse yourself as a means of having a tax-free secondary savings account, providing additional financial defense to your household.
• Let’s say you do not need as much health savings in retirement because you’re fortunate and in great health. At age 65, you may withdraw funds for non-medical expenses. These withdrawals will be treated as ordinary income, just like withdrawing from a 401(k), but with no penalty.
• However, if you are under the age of 65, and you withdraw funds for non-medical expenses, you will be subject to ordinary income tax AND a 20% penalty. Big ouchies!
• When you pass away, if the beneficiary of the HSA is a spouse, there are no further tax consequences. However, if the beneficiary is non-spousal, the balance will be subject to ordinary income tax on distribution.

In conclusion, health savings accounts are very important, powerful vehicles that can help you build significant resources for when you are no longer working. Along the way, they can also act as a secondary emergency fund, and offer flexibility in usage both for medical and non-medical expenses during retirement. If a HDHP is an appropriate health care plan for you, and you have the ability to contribute to an HSA without needing to withdraw from it, an HSA can be an important cornerstone of risk management, retirement savings, and tax avoidance for your golden years.


Reference

Ochieng, N., Cubanski, J., Neuman, T., & Damico, A. (2025, August 21). Health costs consume a large portion of income for millions of people with Medicare. KFF. https://www.kff.org/medicare/health-costs-consume-a-large-portion-of-income-for-millions-of-people-with-medicare/