Potential Long-Term Benefits of Investing Your HSA

Health savings accounts (HSAs) are particularly prized for their triple tax advantages: Contributions are tax-deductible, earnings are tax-free, and withdrawals are tax-free when used for qualified medical expenses. (While HSA contributions, earnings, and qualified distributions are exempt from federal income tax, they may not, in whole or in part, be exempt from taxes in states.) HSAs are not only a tax-smart way to pay for your current health care needs, but you could also rely on your savings—and any potential growth from investing HSA dollars—in your retirement.

As the name suggests, an HSA is a savings account where your money earns interest. Once your balance achieves the minimum threshold set by your plan, you can invest your HSA funds that you don't expect to need immediately, making an HSA a highly effective tax-advantaged strategy for health care expenses in retirement. 

For example, typically, you can't use your HSA to pay for health insurance premiums from your active employer or from the federal or your state's healthcare exchange, but you can use your funds to cover premiums for long-term care insurance, Medicare premiums (except for Medigap), and for many Medicare expenses if you are age 65 or older. Given the likelihood that health care costs will be higher in the future, doing all that you can to get ahead of them is wise, so consider contributing the maximum amount each year as part of your retirement planning strategy.

And although you should use your HSA to cover medical expenses, you could use the funds as an additional source of income in retirement. After age 65, you can use your HSA to pay for things other than health care. You'll owe ordinary income tax on the funds with no other penalty—similar to withdrawals from 401(k)s and IRAs. (Nonqualified withdrawals made prior to age 65 will be subject to ordinary income tax plus a 20% early withdrawal penalty.) However, HSAs aren't subject to required minimum distributions, making them a compelling option for retirement savings overall.

By not investing your excess HSA contributions, you could be missing an opportunity to earn tax-free returns—both now and in the future. Here's how you can contribute to your HSA and get started with investing your account.

To enroll in an HSA, you must participate in an eligible high-deductible health plan (HDHP) offered through an employer or through the healthcare exchange. For an individual account, you can contribute up to $4,400 in 2026 ($8,750 for a family plan), plus an additional $1,000 in catch-up contributions if you're 55 or older.

And if you haven't met your annual limit by the end of the year, you have until Tax Day to fund your account. Let's look at some ways to add contributions to your HSA.

Typically, you contribute to your HSA by deferring a set amount from each paycheck to be directly deposited by your employer into your account. Because the contribution is made pretax, it won't count toward your income.

Your employer may also make a separate contribution to your HSA, such as a match or as an incentive for participating in a wellness program, which will be applied to your annual limit. Employer contributions won't be considered income either, though they will be reported on your W-2.

You're also allowed to contribute after-tax dollars to your HSA to maximize your savings for the year if you aren't able to do so with your employer or don't have an individual eligible HDHP. In this case, you may be able to deduct this amount through your tax return.

Indeed, anyone can fund your account—up to your contribution limit. Although you can't share a joint HSA with your spouse, your spouse can contribute to your HSA family plan so long as both of you are eligible for coverage. (Your spouse can't be insured under their own non-HDHP, enrolled in Medicare, or a dependent under someone else's tax return.) If your spouse is 55 or older, they can't make a catch-up contribution to your HSA—they'll need to add their catch-up to their own account.

While you can deduct spousal contributions on your tax return, the IRS considers contributions from nonspouses as gifts, which are subject to the annual gift exclusion amount ($19,000 for 2026) and are not deductible.

Though not done often, it's possible to roll over a tax-deferred IRA into your HSA to take advantage of tax-free earnings and withdrawals (if used for health care expenses) and no required minimum distributions. This could be especially helpful if you expect your medical costs to increase as you grow older or if you plan to use your HSA as another means of retirement income down the road.

Keep in mind, the rollover will count toward your contribution limit. Here are some other considerations:

• Generally, you may perform an IRA-to-HSA rollover just once in your lifetime. However, if your HSA was originally under an individual plan and you change to a family plan the same tax year, you may roll over the difference in contribution limits of your HSA from an IRA.
• You must remain covered by an HDHP for 12 months after the transfer to avoid owing income tax on the converted amount and, if you're younger than 59½, a 10% penalty for early withdrawal from your IRA.
• If you're close to applying for Medicare, take note that you can't enroll within 12 months of the rollover or else you'll owe income tax on the converted amount—as well as pay a 10% early withdrawal penalty if you're younger than 59½.

Because IRA-to-HSA conversions are uncommon, we suggest you speak to your IRA custodian and consult with a tax professional or financial advisor to make sure you don't sidestep any rules.

If you have multiple HSAs, consolidating them could help you better manage your savings and reduce administration fees. For example, let's say you change jobs and receive coverage under a new HDHP—and HSA. You can move funds from your old HSA to your new one through either a transfer or rollover, and only current-year contributions will count toward your annual limit.

HSA transfers are generally less complicated than a rollover, and there's no annual limit on how many transfers you can make. Plus, you typically won't owe taxes on the transferred funds. With a trustee-to-trustee transfer, your old HSA administrator moves account funds, including an in-kind transfer of investments, to your new custodian.

Be aware that if your current HSA administrator requires you to sell your investments first, you could face fees and potential tax consequences. Though you won't pay capital gains tax on investment earnings at the federal level, you could owe state taxes not just on capital gains but also dividends or interest. After the sale, your current custodian will transfer the cash balance to your new HSA provider.

With an HSA rollover, your current custodian will send you a check instead. You must then deposit the funds into your new account within 60 days to avoid paying ordinary income tax on the withdrawal, plus a 20% early withdrawal penalty if under age 65. Unlike HSA transfers, you can perform only one HSA rollover per year.

Before moving your HSA funds, consider speaking with a tax advisor to help minimize your tax bill.

Most HSAs require you to maintain a minimum cash balance before you can invest your savings, but we generally suggest covering two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA. Once you have sufficient funds to meet your investment threshold you can start investing some of your contribution based on your risk tolerance, your time horizon, and, ideally, a diversified portfolio.

If you feel that your investment choices are limited with your HSA provider, another option that may be available to you is a linked health savings brokerage account (HSBA). Most HSBAs offer you the ability to invest your savings your way, including a wider selection of investments and different levels of investment management.

For example, if you're a more seasoned investor, you may prefer a self-directed account where you can select from a variety of stocks, mutual funds, exchange-traded funds (ETFs), and other assets based on your investment objectives. Whereas, if you're not comfortable with or knowledgeable about trading, you can choose to have an investment advisor manage your portfolio.

Just remember, before investing in any fund, you should consult the fund's prospectus to understand its investment objectives, risks, charges, and expenses. And once you've set up your portfolio, regular rebalancing will help ensure your investment strategies and allocations remain aligned with your savings goals.

When you die, your HSA will go to the designated beneficiary of your account. If your surviving spouse is the designated beneficiary, your account will be treated as their HSA. For nonspousal designated beneficiaries, your HSA will be distributed and taxed to your heir in the year you die minus any qualified medical expenses paid within 12 months of your death. If you don't name a beneficiary, then your HSA will be included as part of your estate on your final income tax return.

An HSA can be a tax-smart way to cover health care costs. And once you turn 65, you can use your savings not just to pay for medical expenses but also as a source of income, akin to other retirement accounts. By maxing out your annual contributions now, you can invest excess funds for tax-free growth—potentially boosting your savings for future use.