How to Maximize Your HSA for Retirement and Taxes

Reading time: 7 minutes

Published: May 27, 2025

Most people think of a Health Savings Account (HSA) as a way to cover medical bills, but if you want to maximize your HSA for retirement and taxes, there’s a lot more to consider. Used strategically, an HSA can become one of the most tax-advantaged tools for long-term savings and healthcare planning.

Key Takeaways

• HSAs offer a triple tax advantage: contributions, growth, and qualified withdrawals are all tax-free.
• You can invest your HSA funds and let them grow, turning the account into a stealth retirement tool.
• Once you enroll in Medicare, you must stop contributing to your HSA to avoid IRS penalties.
• HSAs are more flexible than FSAs, with no “use-it-or-lose-it” rule and broader long-term benefits.

First: Are You Eligible?

To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). These plans typically offer lower monthly premiums in exchange for higher deductibles and out-of-pocket costs. They’re often a good fit for people who are relatively healthy or want more control over how they spend their healthcare dollars.

Some employers also sweeten the deal by contributing to your HSA annually. That’s free money that helps build your balance even faster.

How Much Can You Contribute?

The IRS places annual limits on how much you can contribute to a Health Savings Account (HSA). These limits vary based on your type of high-deductible health plan (HDHP) coverage, whether it’s for an individual or a family, and your age.

Here are the contribution limits for the upcoming years:

2025:

• Individual (self-only) coverage: $4,300
• Family coverage: $8,550
• If you’re 55 or older, you can contribute an extra $1,000 as a catch-up

2026:

• Individual (self-only) coverage: $4,400
• Family coverage: $8,750
• Catch-up contribution (age 55+): $1,000

A couple of rules to keep in mind:

• Employer contributions count toward your total annual limit.
• Going over the limit can result in IRS penalties unless you withdraw the excess in time.

For more details and updated figures, check out Fidelity’s HSA contribution guide ↗.

Why HSAs Are So Valuable

HSAs offer something that’s extremely rare: a triple tax advantage.

• Contributions are tax-deductible, reducing your taxable income now.
• Growth is tax-free, whether it’s interest, dividends, or investment gains.
• Withdrawals are tax-free when used for qualified medical expenses.

This triple benefit puts HSAs in a category of their own. Traditional 401(k)s give you an upfront tax deduction, but you’ll pay tax on withdrawals later. Roth IRAs give you tax-free withdrawals, but you fund them with after-tax dollars. HSAs, on the other hand, offer tax breaks going in, while growing, and coming out, at least when used for qualified healthcare spending.

Your Secret Retirement Account

Many people use their HSA like a checking account for doctor’s visits. But there’s a better way.

If you can afford to cover current medical costs out of pocket, let your HSA balance sit and grow. You can even invest it, turning it into a stealth retirement account. As long as you keep the receipts, you can reimburse yourself later, even years down the line.

For example, I have my HSA at Fidelity and chose to invest the funds in “cash” via the FDRXX money market fund. It’s currently paying about 4% interest. And because HSA earnings are tax-free, that’s the equivalent of earning roughly 5.7% in a taxable account, assuming a combined federal and state income tax rate of 30%. I elected not to invest my HSA in stocks since I already have other accounts focused on long-term market growth.

Note: Some HSA providers used to require a minimum cash balance, like $1,000 or $2,000, before allowing you to invest the rest. But this varies. Fidelity, for example, doesn’t impose any threshold. So it’s worth checking your provider’s policy.

For those in their 50s looking to enhance their retirement strategy, explore these additional retirement planning tips.

After Age 65: Even More Flexibility

Once you turn 65, the rules get even more favorable. You can use the funds for non-medical expenses without the 20% penalty that applies to early withdrawals. You’ll still owe ordinary income tax on those non-medical withdrawals, just like with a traditional IRA, but the flexibility can be helpful in retirement.

If you continue to use the money for medical costs, it remains entirely tax-free. Eligible expenses include a wide range of healthcare needs, such as:

• Dental, vision, and hearing care (eligible at any age)
• Prescription medications (eligible at any age)
• Long-term care services
• Medicare premiums (for Parts B, C, and D, not Medigap policies) once you’re enrolled
• Medicare Advantage premiums (Part C) in most cases

When You Must Stop Contributing to an HSA

Once you enroll in Medicare (Part A or B), you can no longer contribute to an HSA. This is because Medicare coverage disqualifies you from being in a high-deductible health plan, even if you remain on one technically.

A few key points to highlight:

• HSA contributions must stop the month your Medicare coverage begins (even if it’s retroactive).
• Medicare Part A is often auto-enrolled when you claim Social Security at age 65. So if you want to keep contributing to your HSA, delay enrolling in both Medicare and Social Security.
• If you’re still working at age 65 and covered by an HDHP through your employer, you may be able to delay Medicare and continue HSA contributions, but it’s best to plan carefully.
• Contributions made after your Medicare coverage starts are considered excess contributions and may be subject to taxes and penalties if not withdrawn in time.

For details, see Fidelity’s explanation of HSAs and Medicare ↗.

Everyday Uses: Not Just for Big Bills

You don’t have to wait for a surgery or a hospital visit to use your HSA. Many over-the-counter (OTC) items qualify, including:

• Pain relievers, like ibuprofen and acetaminophen
• Cold and allergy meds
• First aid supplies, like elastic bandages/wraps, antiseptic wipes, and first aid kits
• Sunscreen
• Other: contact lens solutions, denture adhesives, and reading glasses

Retailers often mark these items on receipts as “FSA-eligible,” and that usually means they qualify for HSA use as well. Even small purchases can add up, especially if you’re tracking them for future reimbursement.

HSA vs. FSA: What’s the Difference?

It’s easy to confuse a Health Savings Account (HSA) with a Flexible Spending Account (FSA), but they work very differently.

The most important difference: there’s no “use-it-or-lose-it” rule with HSAs.

• Your balance rolls over year after year
• The account stays with you, even if you change jobs or insurance plans
• You can invest and let the money grow over time

When I had an FSA, I found it difficult to predict my healthcare spending in advance. Sometimes I ran out of funds halfway through the year. Other times, I had leftover money and rushed to spend it on things I didn’t really need just to avoid losing it. That’s not a concern with an HSA.

Final Tips for Making the Most of Your HSA

• Make sure your health plan qualifies as an HDHP before contributing
• Max out your HSA contributions if possible
• Save your medical receipts, even if you don’t reimburse yourself right away
• Check your provider’s investment options and fees
• Track qualified purchases, including OTC items, for future tax-free reimbursements

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