How to Use an HSA to Build Wealth

Health savings accounts (HSAs) are a dual-purpose tool for managing healthcare expenses and building wealth. HSAs can offer tax savings at three stages: when you contribute, while the money grows and when you withdraw funds for qualified medical expenses. Contributions are generally tax-deductible, earnings grow tax-deferred and eligible withdrawals are tax-free. Maximizing annual contributions can lead to substantial long-term savings.

For help creating a long-term financial plan or determining how you can build wealth, consider working with a financial advisor.

How an HSA Works

Health savings accounts (HSAs) are tax-advantaged savings accounts designed specifically for people enrolled in high-deductible health plans (HDHPs). These accounts help cover out-of-pocket medical expenses while also offering significant tax benefits.

HSAs are designed to cover a variety of medical expenses, including doctor visits, prescription medications, dental care and even some over-the-counter drugs. You must use the funds for IRS-qualified medical expenses to avoid penalties and taxes. Any withdrawals for non-qualified expenses before age 65 are subject to income taxes and a 20% penalty.

Unused HSA funds remain in your account from year to year, so there is no requirement to spend the balance by an annual deadline. This differs from many flexible spending accounts (FSAs), which may limit how much unused money can be carried forward. Because HSA balances can accumulate over time, you can continue saving or investing money for future medical expenses. The account also belongs to you, which means you can keep it if you change employers or switch to a different health plan.

HSA Contribution Limits in 2026 and 2027

Benefits of Using an HSA

Health savings accounts offer a unique blend of tax advantages and savings opportunities that can significantly benefit your financial health. Designed for individuals with high-deductible health plans (HDHPs), HSAs are a versatile tool for managing medical expenses and planning for the future. Here are six key benefits of using an HSA:

• Triple tax advantage: HSAs offer three separate tax benefits. Contributions may reduce your taxable income, investment gains can compound without being taxed each year and distributions used for qualified medical expenses are generally tax-free. Together, these features can make an HSA a tax-efficient way to save for current and future healthcare costs.
• Long-term savings: HSA balances can carry over from one year to the next, so unused money is not forfeited at the end of the year. This allows the account to build over time and potentially provide a larger pool of funds for future healthcare costs or expenses in retirement.
• Investment opportunities: Many HSA providers allow you to invest a portion of your balance in mutual funds, ETFs or other investments. Some require you to maintain a minimum cash balance before investing, while others have no investment threshold. You can invest in mutual funds, stocks or bonds, similar to a 401(k) or IRA, enabling your contributions to grow and increase your wealth over time.
• Flexibility: An HSA belongs to you rather than your employer, so the account remains yours if you change jobs. You can also keep the account if you switch health plans, although you must remain HSA-eligible to make new contributions. Existing funds can continue to be saved, invested or used for qualified medical expenses.
• Tax-free withdrawals for qualifying expenses: This means you can pay for a wide range of healthcare costs, including doctor visits, prescription medications and dental care, without incurring additional tax liabilities.
• Retirement benefits: After age 65, you can use HSA funds for non-medical expenses without a penalty, though they will be subject to ordinary income tax. This feature makes HSAs a valuable supplementary retirement savings tool, offering flexibility and additional financial security in your later years.

California and New Jersey State Taxes

California and New Jersey do not follow federal HSA tax treatment. Contributions are not deductible on state returns, and interest, dividends and realized capital gains are generally taxable annually at the state level.

Residents may need to track investment cost basis for state tax purposes. The federal HSA benefits still apply.

How to Use an HSA to Build Wealth

This strategy involves contributing regularly, limiting current withdrawals and investing money not needed for near-term expenses. It works best when the account holder has adequate emergency savings.

Step 1: Confirm Eligibility

Verify eligibility before contributing. Someone who later switches to nonqualifying coverage may keep, invest and spend an existing balance but cannot contribute while ineligible.

Step 2: Set an HSA Cash Buffer

A common guideline is to hold the lesser of $2,000 or the annual deductible in cash. A larger buffer may be appropriate for ongoing medical costs or limited emergency savings.

Some providers require $1,000 to $2,000 in cash before allowing investments. This creates cash drag because that money may earn little interest. Providers with low or no investment thresholds can allow more of the balance to remain invested.

Step 3: Maximize Contributions and Employer Funding

HSA funding may include:

• Employer contributions or matching deposits
• Pretax payroll contributions
• Direct personal contributions

Payroll contributions generally avoid federal income and payroll taxes. Direct contributions are generally deductible but do not receive the payroll tax benefit. All funding sources count toward the annual contribution limit.

Step 4: Select HSA Investments

Low-cost broad-market index funds can provide diversification, while target-date funds offer a portfolio that becomes more conservative over time. Both may reduce concentration risk compared with individual stocks.

Investments should reflect the account holder’s time horizon, risk tolerance and expected medical needs. Money needed soon may be better held in cash because investments can lose value.

Step 5: Use Delayed Reimbursement

The delayed-reimbursement or “shoebox” strategy involves paying qualified expenses with non-HSA money and leaving the HSA invested. Reimbursement can occur later if the expense was incurred after the HSA was established and was not previously reimbursed or deducted.

Records should include:

• Itemized receipts showing the provider, patient, service and amount
• Explanation of Benefits documents
• Digital or cloud backups
• A spreadsheet tracking reimbursed and unreimbursed expenses

A receipt tracker can include Date, Provider, Patient, Service, Amount, Receipt Link and Reimbursement Status. Using the HSA for current expenses may be more practical if paying out of pocket would create debt or weaken emergency savings.

HSA Investing in Action

Suppose you’re eligible to contribute to an HSA and have enough emergency savings to cover unexpected costs. You keep $2,000 in cash for near-term medical expenses and invest the rest. You also contribute $3,000 to the account each year through payroll.

Later, you receive a $1,500 qualified medical bill. Instead of withdrawing from your HSA, you pay from your checking account and save the receipt, allowing that $1,500 to remain invested.

If you continue contributing $3,000 annually and your investments earn an average 7% annual return, those recurring contributions could grow to about $123,000 over 20 years. The $1,500 you left invested could grow to about $5,800 over the same period. Actual returns will vary, and investment losses are possible.

Bottom Line

An HSA can support current healthcare spending and long-term retirement planning through tax-advantaged contributions, tax-free growth and tax-free qualified withdrawals. The strategy may involve maintaining a cash buffer, investing the remaining balance, saving medical receipts and coordinating contributions with state taxes and other retirement accounts.

Tips for Building Wealth

• A financial advisor can guide you in building a long-term financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• When you’re looking to build wealth it’s important to know what type of investment portfolio and risk profile fits your needs. Consider using an asset allocation calculator to see what might be a fit for your portfolio.

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