Health Savings Accounts (HSAs): Tax-Advantaged Powerhouses

We all know just how expensive medical bills can be. Whether you've just had a baby or your child has broken their arm by falling off the swing set, associated costs can be in the thousands depending on your healthcare plan.

These costs aren't just burdensome—they're all too common. Just consider some of these findings from the Kaiser Family Foundation¹:

• 36% of U.S. adults say they've skipped or postponed getting needed healthcare over the past 12 months because of cost.
• 75% of uninsured adults say they've done the same.
• 43% say they haven't taken medicine as prescribed because of costs.
• 41% of U.S. adults say they have some type of debt due to medical or dental bills (whether their own or someone else's care).
• 24% say those bills are past due or that they're unable to pay them, 21% are paying them off over time directly to a provider, and 17% reported debt owed to a bank, collection agency, or other lender.
• 50% of U.S. adults say they would not be able to pay an unexpected medical bill of $500 or more.

It's a staggering problem—one whose broader answer likely lies in structural reforms that we newsletter writers aren't in any position to enact.

But some people are in a position where at least a little financial maneuvering can go a long way—and those people could be well-served by utilizing a health savings account (HSA).

What Is an HSA?

A health savings account is a tax-advantaged account used to save for and pay qualified medical expenses. 

That said, this isn't just a stagnant account that merely holds your money—you can actually invest through an HSA, allowing you to grow your money much faster. 

It's a relatively new vehicle—they were created in late 2003 with the passage of the Medicare Prescription Drug, Improvement, and Modernization Act. But they've become pretty popular since then, with more than 41 million Americans covered by these accounts as of the end of 2025.

Young and the Invested Tip: Want to invest in an HSA? These Vanguard funds are a great starting point.

HSAs are a flexible tool, too. You can use HSA funds to pay for qualified healthcare expenses for yourself, your spouse, any person claimed as a dependent on your return, or any person you could have claimed as a dependent except that either: 

• The person filed a joint tax return. 
• The person had gross income of $5,300 or more (for 2026).
• You, or your spouse if you're filing a joint return, could be claimed as a dependent on someone else's tax return.

However, if you use HSA funds for something other than a qualified medical expense, you'll owe federal income tax on that money and might be hit with a 20% penalty by the Internal Revenue Service (IRS).

So … what's the big deal?

The most noteworthy feature of the HSA isn't that it lets you save—it's that it lets you save while taking advantage of not one, not two, but three tax benefits: 

1. Reducing taxable income

"The first tax benefit allows any contributions made to an HSA to be tax-deductible, or if made through payroll deductions, are pre-tax which can lower your overall taxable income," says Chris Labrecque, an independent consultant for Tarpon Benefits LLC. "Ultimately, this means you can deduct the amount you contribute from your gross income when you file your taxes. This reduces your taxable income for the year and results in a lower tax bill overall."

2. Tax-free investment growth within the account

"The second tax benefit becomes relevant if any contributions to your HSA are invested in the market," he says. "Any interest or investment earnings on your account will not be taxed. This benefits the owner of the account, allowing them to grow their savings more efficiently over time."

3. Tax-free withdrawals for qualified medical expenses

"The third tax benefit of an HSA is that the dollars can be spent, tax-free, if used for qualified medical expenses," Labrecque says. "These expenses include a variety of healthcare costs such as doctor visits, prescription medicines, and certain medical procedures."

And that tax penalty I mentioned? It doesn't apply forever. Once you turn 65, you'll no longer eat the penalty for withdrawing money to spend on unqualified expenses.

Young and the Invested Tip: Fidelity retirement funds like these are another solid option for your HSA money.

HSAs: A Powerful 'Hybrid' Account

So what you really have with an HSA is an account that allows you to …

• Stash away money on a pretax basis
• Withdraw that money without penalty to finance myriad health-related costs, creating a de facto discount on your healthcare expenditures
• Grow that money over time without tax consequences
• Wait until retirement to spend that money
  • If you end up using it on healthcare costs, you'll enjoy the same triple tax benefit
  • If you use it for other purposes, you'll be taxed on the withdrawals, but still have enjoyed the same tax benefits as a traditional IRA.

That's a significant savings benefit for people looking to reduce their healthcare costs—or an additional retirement account for those who don't need the help.

That said, not everyone can access HSAs. Here's what you need to know.

Who Can Contribute?

You're only allowed to contribute to a health savings account (or have someone else contribute on your behalf) if all the following are true:

• You're covered under a qualified high-deductible health plan (HDHP) on the first day of the month
• You don't have other health insurance coverage
• You aren't enrolled in Medicare
• You can't be claimed as a dependent on someone else's tax return for the year

The account holder can make contributions to an HSA, but so can the account holder's employer or family members. 

Only cash contributions are allowed. You can't contribute stock or property to an HSA.

Also, even though HSAs are often available through an employer-sponsored health insurance plan, you can keep an HSA if you change jobs or retire (i.e., it's "portable").

High-Deductible Health Plan Requirements

If you want to contribute to an HSA, your high-deductible health plan must also satisfy certain requirements. 

For 2026, it must have an annual deductible of at least $1,700 for self-only coverage ($1,750 for 2027) or $3,400 for family coverage ($3,500 for 2027).

Also, the maximum out-of-pocket expenses paid under an HDHP can't exceed $8,500 for self-only coverage ($8,700 for 2027) or $17,000 for family coverage ($17,400 for 2027). Out-of-pocket expenses include deductibles and copayments, but it doesn't include health insurance premiums.

Contribution Limits

The maximum amount you can put in an HSA is adjusted for inflation each year. So, the maximum contribution limit typically goes up every year. 

The HSA contribution limits for 2026 and 2027 are:

• $4,400 for self-only coverage ($4,500 in 2027)
• $8,750 for family coverage ($9,000 in 2027)

If you're at least 55 years old at the end of the year, you can contribute an additional $1,000 on top of the HSA contribution limit for the year. The additional contribution—commonly known as a "catch-up" contribution—isn't adjusted for inflation, so it stays the same from year to year.

Your contribution limit for the year is reduced by any amount contributed to an Archer medical spending account (MSA) in your name or contributed by your employer to an HSA in your name. It's also reduced to zero starting with the first month you're enrolled in Medicare (including periods of retroactive Medicare coverage).

Young and the Invested Tip: If you want to make the most of your HSA, you'll want to avoid these common account pitfalls.

When Can You Contribute to an HSA?

You can start contributing to an HSA once your high-deductible health plan takes effect. From that point, you have until the tax filing deadline for the year to make contributions to your HSA. So, for example, you have until April 15, 2027, to put money in an HSA for the 2026 tax year. This time frame applies to contributions from your employer, too. For the 2027 tax year, you have until April 15, 2028.

If you make contributions to an HSA from Jan. 1 to the tax filing deadline, make sure to notify the HSA bank or administrator if you want it to apply to the previous year's contribution limit.

What Happens If I Contribute Too Much?

If your contributions for the year exceed the HSA contribution limits, the IRS can assess a 6% penalty on the excess amount. The penalty also applies to each tax year the excess contribution remains in your HSA.

In addition, you lose the benefit of income tax-free contributions when you go over the HSA contribution limits. So, you can't deduct an excess contribution you make to your HSA, and an excess contribution made by your employer must be included in your gross income.

The good news is that there's a way to avoid the 6% penalty. It won't apply if you do both of the following:

• Withdraw the excess contributions by the due date of your tax return for the year the contributions were made (including tax filing extensions)
• Withdraw any income earned on the withdrawn contributions and include it as taxable income on your tax return for the year you withdraw the excess contributions and earnings

You can also deduct an excess contribution from a previous year that is still in your HSA. The amount you can deduct is the lesser of:

• The maximum amount you can contribute to an HSA for the year, minus any amounts actually contributed to your HSA by you, your employer, or anyone else for the year
• The total excess contributions in your HSA at the beginning of the year

Again, an HSA isn't a cure-all for America's healthcare debt woes. But it can supercharge the power of some of your healthcare dollars if you need it. And if you don't, it's a way to sock away a little bit more toward retirement.

¹ KFF: Americans' Challenges With Healthcare Costs

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Thank you as always for reading, and we'll see you again next week!

Riley & Kyle

Young and the Invested

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