HSA 101: Everything You Need to Know About Health Savings Accounts, According to a Financial Advisor

Written by Julie Woon, MSJ

A Health Savings Account might be one of the most underused tools in personal finance. We sat down with Jeremy Woltz, a financial advisor with The Main Street Group in Richmond, Virginia, who specializes in retirement, tax strategy, and legacy planning, to answer the questions we hear most often about HSAs.

What is a Health Savings Account?

Jeremy Woltz: HSA stands for Health Savings Account, and the whole idea behind it is it's an account you put money into that actually reduces your taxable income. So you get a nice little tax break. But it's money you get to use specifically toward qualifying medical expenses, and any money you spend from it for a qualified expense is also tax-free. It's a really highly tax-advantaged account, available to people on certain kinds of healthcare plans.

Why should someone in their 20s, 30s, or 40s pay attention to an HSA?

If you're in your twenties, you're the absolute prime candidate to take full advantage of an HSA. It's tax-free going in, so it reduces your taxable income. It's tax-free while it grows, so if you know how to invest it, you get compound growth with no tax drag. And withdrawals are tax-free too! As long as it's for a qualifying medical expense. That's powerful for anyone, but especially if you're young. You've got 30 or 40 years to let this grow in the market, and there's actually a way to reimburse yourself later for decades of medical expenses you paid out of pocket, with totally tax-free money.

What's the difference between an HSA and an FSA?

HSA and FSA (which stands for Flexible Spending Account) get confused a lot, but they're really different. The HSA travels with you. You own it, not your employer. Even if your employer opens it for you, you keep it for the rest of your life, no matter where you work next. An FSA belongs to your employer. Leave that job, and you forfeit whatever's left inside it.

The HSA also lets you invest. You can get market exposure and let it grow. An FSA is just cash; you can't invest it. And the FSA is "use it or lose it." You get the calendar year to spend it. Some plans allow a small rollover of around $680, with a grace period into March, but miss that and you lose the rest. 

An HSA rolls over forever. You never have to spend it, and you maintain total control. The only downside is that you have to be on a high-deductible health plan to be eligible for an HSA. You can have an FSA with any plan.

Is there anyone an HSA isn't a good fit for?

Everyone can benefit from the tax advantages, but not everyone can take full advantage of the strategy. If you're claimed as a dependent on someone else's taxes, you're not eligible. Same if you're already on Medicare Part B or Part D. And the bigger one that affects more people: If you have high, consistent, ongoing medical expenses, you need to do the math on whether you can actually afford the deductible, or whether a plan with a lower deductible and higher premiums makes more sense for you right now. It really varies from person to person, but people with high immediate, short-term medical needs may find it's not the best option.

What is the "triple tax advantage" everyone talks about?

This is the only account we have access to with this kind of benefit. It's tax-free going in, so it lowers your taxable income dollar for dollar in the year you contribute. It's tax-free growth, so there's no tax drag on your investments. And withdrawals for qualifying medical expenses stay tax-free too.

Compare that to a 401(k), which is tax-free going in but fully taxed when you withdraw in retirement. Or a Roth IRA, which is taxed going in but tax-free coming out. The HSA is the only account that's tax-free across all three.

Jeremy consulting with a client.

What can you actually spend HSA money on?

It's kind of fun, because the list of qualifying expenses grows every year, and there's an IRS website where you can look it up. Mental health counseling is a big one. I'm a big advocate; I'm in therapy myself, and I use my own HSA to pay for it. I'd recommend you all do the same. In vitro fertilization (IVF) and fertility-related charges qualify. So do co-pays, insurance premiums, Continuous Positive Airway Pressure (CPAP) machines, breast pumps, and lactation consultations. Even acupuncture technically falls under a qualified medical expense.

My tip: Go to a site like Costco or Amazon and filter by what's FSA or HSA eligible. If you're ever unsure, just search it there.

What happens if you accidentally use HSA money for something that doesn't qualify?

It can be a pretty big deal if you're under 65. You'll pay income tax on whatever you spent, plus an additional 20% penalty, and that can really eat away at your funds. So be careful and track how you're spending it.

If you're over 65, it's not so bad. The HSA can work like a secondary IRA in retirement: anything you pull out after 65 gets taxed as regular income, but there's no penalty. Before 65, though, you want to keep it strictly to qualified medical expenses.

When does it make sense to invest HSA funds instead of leaving them in cash?

Almost every provider has something called a cash minimum, usually $1,000 or $2,000, and anything above that is what you're allowed to invest. Then, it's two different answers. If you're in a really great financial situation and can pay your medical expenses out of pocket, invest every dollar you can in your HSA.

If you're relying on your HSA to pay for some of your medical expenses now, which is most people, do a little napkin math. Look at the next 12 months of expected expenses and leave that as your cash cushion. Say the minimum is $1,000 but you typically have $2,000 in medical spending a year. Keep a $2,000 cushion, and anything above that should get invested as soon as possible.

How much can you contribute to an HSA?

This one's important. If you're single with self-only coverage, the limit is $4,400 per year. On a family plan, it jumps to $8,750, which is $50 shy of double. I don't know why they do that, but that's what you get.

Keep in mind that if your employer is contributing, it's the same limit, just with multiple people pouring into that bucket. If your employer puts in $1,000 and you have single coverage, you can only contribute $3,400 yourself. If you accidentally go over, say a total of $5,000, you get hit with a 6% excise tax until you fix it by withdrawing the excess.

Where does the HSA fit in the priority order with a 401(k), IRA, and paying off debt?

Sequencing is really important when you're thinking about financial health.

First and foremost, if your company has a 401(k) match, that's your number one priority. Do everything you can to get the full match. It's the only way to guarantee you double your money. After the match, that's where the HSA comes in, especially if your employer is willing to contribute to it too. After the HSA, the next priority is paying down high-interest debt: credit cards, student loans, car loans, whatever you have.

After that, I'd recommend a Roth IRA as a really great tool. Then circle back and maximize your 401(k) if you can. The employee deferral limit is as high as $24,500 this year, 2026. For almost everybody, you also want to put some money into a taxable brokerage account, but that's probably your lowest priority when you're young. As you near retirement, especially if you want to retire early, it jumps up. 

This is general advice, and it varies case by case, but the rule of thumb is: 401(k) match, HSA, high-interest debt, Roth, and brokerage.

People call the HSA a "stealth IRA." How does that work?

That's exactly the nickname we use. You can invest in it now and contribute, and just like a 401(k), that reduces your taxable income. You let it grow, and you use it tax-free for all these medical expenses.

What a lot of people don't realize is that when you hit 65, you get even more flexibility. You can still use it for medical expenses with tax-free withdrawals, which is fantastic. But say you're self-insured and need a little more cash flow. Any money in your HSA at 65 or older, you have the right to pull out, and you just pay regular income tax like you would with a 401(k) or IRA.

That's really powerful. If you have the cash flow to max your 401(k) and your IRA, you can still contribute to an HSA on top of that. You're getting even more in that you can invest over time and use to fund your retirement years.

Are there downsides to treating the HSA as a long-term investment vehicle?

Everybody benefits from the tax status. Even if you're just running money in and out to pay for immediate things, that's helpful. But the reality of being on a high-deductible plan is that you have to be able to cover that deductible. The minimum for self-only coverage is $1,700, and it's $3,400 for a family. That can be a lot to pay out of pocket.

If you're essentially going to put money in and immediately pull it back out, you still get the tax benefit, but you won't really be able to invest it and set yourself up with that stealth IRA. It may not be the best fit for everyone.

The other thing is that to really leverage an HSA, you have to have the discipline to track receipts. If you already know yourself and you're thinking, "I'm never going to be able to track receipts," then this may not be the best strategy.

Real-life scenario: I'm 28, healthy, and rarely go to the doctor. How should I think about my HSA?

If that's you, then you are the prime candidate to take full advantage of an HSA. You've got multiple decades to benefit from compound investing in the market, and you have extremely low expenses, which means you don't need much of a cash cushion. The vast majority of your HSA funds can go and get invested.

Whatever that cash minimum is, say it's a thousand bucks, every dollar above it goes into the stock market to grow. That's going to fund your retirement, it's going to fund medical expenses, and it's going to fund so many powerful things other people just can't take advantage of.

Real-life scenario: I'm 35, I have kids, and my healthcare expenses are more predictable. Does the strategy change?

You're describing me, by the way. I'm 38 with a seven-year-old and a four-year-old at home, and I'll tell you, medical expenses just skyrocket. You have the predictable stuff: kids' doctor visits, your own visits, dental appointments. Then you have the unexpected. No matter how coordinated your child is, they're going to skin a knee or need stitches at some point.

So, the strategy shifts toward your cash cushion. At 28 you don't need much of one. At 35 with multiple little kids, you need to be prepared for the unexpected. Look at the next 12 months and say, okay, we know we'll have five or six dental visits, so let's set that money aside. Then build in a little extra margin, because you never know when little Susie is going to fall, or when a bug is going to go around the elementary school. Don't stop investing and don't stop contributing. Just know that more of it should sit in cash.

What about someone with a chronic condition or regular prescriptions?

There's still benefit from the tax advantage. As long as you can afford the high-deductible plan, the tax advantage is always worth it. But this is someone who's likely going to use the account almost entirely as a cash account. For most people I'd say don't leave it in cash, but this is the situation where it makes the most sense. If you're regularly paying money out, you likely can't let it invest, because a short-term loss could leave you unable to afford your care. That would be a shame.

It's still a good option. I'd recommend shopping around, looking at what's available to you, and running the math. Does it make more sense to have a high-deductible plan with an HSA, or a low-deductible plan with slightly higher premiums that covers more of your ongoing needs?

What happens to your HSA when you change jobs?

That's what's really cool about these. HSAs travel with you. You, the individual, own it. You can even change providers if you want, and I always recommend looking at what providers offer, because they have different investment options, cash minimums, and fees. When you leave your employer, you can roll your HSA over to a new provider if you'd like, but it sticks with you forever, and you never have to take money out.

The one thing to bear in mind: if you're not currently covered by an HSA-eligible plan, you cannot contribute. A lot of times people change jobs or go self-employed and don't realize they need to stop their contributions during the transition. If you contribute when you're not allowed to, you get hit with that same 6% excise tax I mentioned earlier. But the beauty is that it goes wherever you go.

What if my employer doesn't offer an HSA-eligible plan?

First off, that's okay. The HSA that's already been funded is still yours and can sit there. You can still use it to cover qualified medical expenses and you can still invest it. It's not a loss. You just can't keep adding to it.

If you're unemployed or self-employed, you can find HSA-eligible plans on the ACA marketplace. They're not overly expensive. They're high-deductible, so the premiums are pretty low, and you can fund the HSA yourself and have total control over who your providers are. That might be a really good fit for some people. And if you get a job with a new employer whose plan doesn't have an HSA attached, run with it. It's better to have healthcare than not to have it. Just know your HSA can still grow. You just can't add to it yourself.

How should couples think about HSAs when they get married?

I don't want to get too in the weeds, because that can be overwhelming, but there are a couple of big things to be aware of.

When you get married, your individual plan becomes a family plan, so you have that not-quite-double contribution limit of $8,750. If both partners have a separate HSA, you're still limited to $8,750 combined. Any amount that goes into either HSA counts toward that limit. So it's really important to discuss how much each of you is contributing and how much your employers are contributing, so you don't accidentally go over.

Also, if only one of you has an HSA, it can be used to cover expenses for the whole household, even though it's an individual account.

And here's a lesson from my own life. When I got married, I went onto my wife's insurance. She worked for a much bigger company with a much better insurance situation. I left my plan behind, and the HSA came with me. But her plan was structured with an FSA and wasn't a high-deductible plan, so it didn't qualify. That meant I could no longer contribute to my own HSA. So, it's important to know whose health insurance you're going to use, and to make sure you're not disqualifying yourselves from contributing. The HSA doesn't go anywhere, so it won't hurt you too much, but you want to be aware of all the ramifications.

How does reimbursing yourself later for old medical expenses actually work?

You can geek out on this, and I love this part of it. If you can afford to do this, and not everybody has the opportunity, you cash-flow your medical expenses. That means you pay for them from a different source, like your bank account or paycheck, and you keep every single medical receipt from after you open the HSA.

All the while, your HSA is just growing and getting bigger. This is where it's really important to invest, because if it's growing as cash, it's not growing much. If you invest it, you get full market exposure, which has averaged 10 to 12 percent over the last 30 years. I can't say it'll always be that, but take advantage of it while you can.

Then in five years or 35 years, it doesn't matter. It's entirely under your control as the account owner. You decide when to reimburse yourself. You submit those receipts and withdraw that money tax-free, even after it has doubled, tripled, or quadrupled in the market in the meantime. You end up with a lot more money to fund all of the medical expenses you were previously paying out of pocket.

What records do you need to keep besides receipts?

Receipts are the most important. Sometimes you'll get something called an Explanation of Benefits, or EOB, which lists the provider, the service provided, and even an itemized receipt. If you get one of those, definitely keep it. Those are the two most important things. Sometimes you may also be asked to prove you weren't already reimbursed through insurance or the HSA, so keep digital access to your bank statements.

Almost nobody does this, because keeping track of receipts for 30 years feels intimidating. I get it. But it's not that hard today. There are apps built specifically for this, like Reimbursable, HSA Vault, and HSA Track. You snap a photo of a receipt or connect your bank account, and it files your medical expenses automatically so you can keep track of them for decades. They're around $20 a year, and they'll save you more than that.

My own version is the poor man's approach. I have an iCloud folder where I drop a scan of every medical receipt, and I use Claude to sweep that folder at the end of every month and update a running spreadsheet of my medical expenses. It's not hard, but it's crucial. You have to keep track of receipts to do this strategy.

Can HSA money be used to pay health insurance premiums in retirement?

There's some nuance, but yes. At 65, if you go on Medicare, you can pay Part B and Part D premiums from your HSA. You can no longer contribute, but you can use the funds. You can also use it to pay COBRA premiums, which is great to have. If you've built up your HSA, you could have your medical expenses in retirement covered tax-free from that account.

The one thing to bear in mind is that if you're on a private marketplace or an ACA marketplace plan that isn't HSA-eligible, you may not be able to pay those premiums with your HSA. So check for that. But as a whole, yes, you can cover Medicare Part B and Part D using your HSA.

What happens to your HSA if you pass away?

Taxes always make things complicated. If you're married and your spouse inherits your HSA, that's the best-case scenario, if there is such a thing. They inherit it, it becomes theirs, there's no tax situation, and they get to use it as their own.

If it's a non-spouse, say you and your spouse pass away at the same time and your kids inherit it, they get hit with what we call a tax bomb. Every single dollar in that HSA is now subject to income tax for them. If you're estate planning and thinking about what you're leaving behind, that becomes an important part of the conversation.

What you can do is this: Whatever is a qualified medical expense for the account owner can reduce the taxable amount in the year they pass, so you want to keep tracking. But yes, your children or other non-spouse inheritors will owe taxes, because that money just becomes theirs.

Jeremy and a colleague at the firm.

Are there any popular HSA "hacks" you'd caution people against?

Yes. Some of these are just people trying to get away with what they can. A lot of people say you only need receipts if the IRS audits you, so don't worry about it. It's not worth the risk. You shouldn't wing it. You want to have your receipts so that if it ever happens, you avoid trouble. And again, it's not that hard. Use the cloud or an app.

The other one, and this is becoming more popular, is the advice to never leave any cash. Invest everything, go a hundred percent aggressive. That sounds interesting because obviously you can grow more money. The problem is liquidity. Let's say something happens and you suddenly need this money, but we're in a down market. All of a sudden that tax-free gain becomes a tax-free loss, and you have less money than you put in. That's the opposite of what you want when you're investing. That's why the cash cushion is so important. Whatever you're likely to need over at least the next year, leave in cash, and invest the rest.

What's the biggest mistake you see people make with HSAs?

Number one, people don't know you can invest it. It sits there for decades as cash. You still get the tax benefit going in and coming out, but you miss the middle portion, which is the most powerful part: the compound growth you can experience in the market. A lot of people don't even know that's possible because, like an FSA, they assume it has to be cash. If you have an HSA, look at what your investment options are.

To give you a brief idea, I'm an advisor in Richmond and we work with Charles Schwab as our custodian. Our clients can open what's called a health savings brokerage account. Any amount above the cash minimum can be swept into that account, and I can manage it for them and make sure it's invested. Everyone with an HSA should look at their plan and ask: ‘Is this an option? Can I invest this? How do I get it there?’

What's the biggest misconception people have about HSAs?

Definitely that it's use it or lose it. This morning I was walking my daughter to school and talking with some of the other parents in preparation for this episode. One of them said, ‘I have one of those, but I have to spend it at the end of every year. I always buy random gadgets just so I don't lose the money.’ I was able to tell her, you don't have to do that. If you have an HSA, just leave it.

The other really big one is that people think you either have to be sick or have kids for an HSA to be worth it. In reality, a young, healthy person with low medical expenses is the prime candidate for taking full advantage of an HSA. Those are the two biggest misconceptions I run into.

Can you go too far maxing out an HSA?

You can. The HSA is such a powerful thing that a lot of folks, and a lot of advisors like me, will tell you to max it whenever you can. But say you're maxing your HSA and you're no longer taking advantage of the match at work for your 401(k). That's a mistake. You want to do the match above all else.

Another trap is that some people get so into how great the HSA will be down the line that they try to cash-flow expensive medical bills now and end up putting more and more on their credit card. If you're racking up high-interest debt, you're doing this in the wrong order. You don't need to put yourself into more debt in order to fund this account. It exists to pay medical expenses now and later. So, please don't take on debt when you have this tax-free cash available for the exact same expenses.

Is there anything else people should know?

One small but important thing: if you use HSA funds, you have to report it on your taxes. There's one specific tax form, Form 8889. Note, this is when you use HSA money, not just when you contribute. If you forget, it's not the end of the world, but it causes a headache. It's better to get it right the first time.

The other thing I'd say is that this is one of the most powerful benefits out there, whether your employer provides it or you're self-employed and providing it to yourself. You don't want to forget about it. If you just let cash sit there, the dollar amount doesn't go down, but the buying power does. Inflation is around 2.5-3% at any given moment, so if your money isn't making money, it's losing power. Just make sure you're investing at least a small portion of it, if nothing else.

How can people connect with you?

You can find me at Jeremy Woltz on LinkedIn or through The Main Street Group at themainstreetgroup.com, where his team offers free financial plans for almost anyone looking to get a clearer picture of where they stand and what small tweaks they can make.

Want to hear more from Jeremy? Check out the YMyHealth Podcast on our YouTube channel or on your favorite streaming platform!