Why Maxing Out Your HSA Could Pay Off in Retirement

Your health savings account could be doing a lot more than paying for prescriptions and doctor visits. Most people withdraw money as soon as medical bills arrive, missing the chance to build a sizable retirement fund. With open enrollment underway, choosing the right health plan and investing your HSA balance could make a meaningful difference to your finances years down the road.

Three tax breaks worth using

An HSA offers a triple tax advantage that's hard to find elsewhere. Contributions reduce your taxable income, investment earnings grow tax-free, and withdrawals aren't taxed when used for qualified medical expenses.

That includes dental care, prescriptions, and certain Medicare costs, including Part B, Part D, and Medicare Advantage premiums. You need an HSA-eligible high-deductible health plan to contribute, but the money remains yours even if you switch coverage later.

Once you turn 65, you can withdraw money for nonmedical expenses without the 20% penalty that applies to younger account holders. You'll still owe ordinary income tax, much like with a traditional IRA.

Medical withdrawals, however, remain tax-free, giving you a way to cover healthcare expenses without adding to your retirement tax bill.

How much you can save

The IRS has set the 2027 contribution limits at $4.5K for individual coverage and $9K for families. If your employer contributes to your HSA, that money counts toward the same limit, so check how much room you have left before increasing your payroll deductions.

Those contributions could become more valuable as health insurance gets pricier. Employers expect healthcare benefit costs to rise 8.2% in 2027, the biggest increase since 2003.

Many are responding with higher deductibles and more cost sharing, leaving employees to cover a larger share of their bills. Federal workers face an average 10.9% increase in FEHB enrollee premiums next year.

Americans are already putting substantial amounts into these accounts, but much of that money doesn't stay there. Contributions approached $60B in 2025, while withdrawals totaled nearly $45B. For people who can afford to pay current medical bills separately, keeping more of that balance invested could pay off over time.

Why investing the balance pays

HSA assets reached nearly $174B at the end of 2025, up 19% from the previous year. Investment holdings grew even faster, climbing 33% to roughly $85B.

Still, only 4.2M of the 41.7M open accounts held investments. That's about one in 10 account holders, yet those accounts controlled 59% of all HSA assets.

Many providers automatically keep contributions in cash unless you choose otherwise. If you have enough savings to handle near-term medical bills, consider moving the money you won't need soon into diversified, low-cost funds.

You'll take on market risk, but you also give your savings a chance to grow rather than sitting in an account earning little interest.

The potential need is substantial. Fidelity estimates that a 65-year-old retiring in 2026 could spend $185.5K on healthcare, up 7.5% from a year earlier.

That figure doesn't include long-term care, most dental expenses, or over-the-counter medicine. Medicare Part B and Part D premiums alone account for about 45% of the estimate, or $83.5K.

What to do during open enrollment

Start by comparing the total costs of your available health plans, rather than choosing whichever has the lowest monthly premium. Look at deductibles, out-of-pocket limits, expected medical expenses, and any HSA contributions your employer offers.

A high-deductible plan can make sense even if you visit the doctor regularly, particularly when lower premiums and employer contributions offset the additional costs. But if paying a large deductible would force you to borrow money, a traditional plan may be the better choice.

If an HSA-eligible plan works for your budget, aim to contribute as much as you comfortably can. Keep enough cash available for upcoming medical expenses and invest the rest for longer-term needs. Paying smaller medical bills from your regular income can also help preserve your HSA balance.

One final habit could prove especially useful: save your medical receipts. The IRS allows you to reimburse yourself tax-free for qualified expenses incurred after opening your HSA, even years later, provided you haven't already been reimbursed or deducted those expenses.

That means you can let the money grow today and withdraw it against eligible past expenses when you need cash later. The real advantage of an HSA isn't simply what it saves you on this year's taxes, but how much you can keep for the medical bills waiting in retirement.