It’s the late 1790s, and President John Adams has a problem. American sailors are coming home battered and broke after months at sea, facing steep medical bills on shore. Adams, ever the practical New Englander, responds by signing a law taxing merchant mariners 20 cents a month to fund a network of “marine hospitals” for their care.[1] This early “health savings plan” meant injured sailors could heal up without emptying their pockets.
These days, we’re no longer taxing sailors’ rum rations for hospital funds. Instead, we have the Health Savings Account (HSA) – arguably one of the most underrated tools in retirement planning. In this article, we’ll break down what an HSA is, how it works, who should consider one, and who might steer clear. To top it off, we’ll explore how an HSA can become a hidden heavyweight in your retirement strategy, offering triple tax advantages and long-term investing benefits. In many ways, it’s superior even to the Roth!
What Is a Health Savings Account (HSA)?
In a nutshell, a Health Savings Account (HSA) is a special savings and investment account designed to help people pay for medical expenses in a tax-advantaged way. If you’re enrolled in a qualifying high-deductible health plan (HDHP), you can contribute to an HSA and use the money for healthcare costs like doctor visits, prescriptions, and hospital bills.
HSAs haven’t been around as long as, say, IRAs or 401(k)s. They were created by Congress in late 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, and became available in 2004.[2] Lawmakers built on the idea of Medical Savings Accounts (MSAs) from the 1980s and 90s, which were an experiment in letting people save tax-free for medical costs. The early MSAs were limited in scope and never really took off, so HSAs were the next evolution.
How Does an HSA Work?
An HSA functions a bit like a hybrid between a checking account and an investment account, with special tax treatment. Here’s the play-by-play of how HSAs work:
Eligibility
Not everyone can open or contribute to an HSA – you need to be enrolled in a High‑Deductible Health Plan (HDHP) to qualify. For 2025, an HDHP must have a deductible of at least $1,650 for individual (self-only) coverage or $3,300 for family coverage, and out-of-pocket maximums no greater than $8,300 (individual) or $16,600 (family).[3]
In practice, if your health insurance is labeled “HSA‑eligible,” it meets these criteria. You also can’t be enrolled in Medicare or be claimed as someone else’s tax dependent to contribute to an HSA. It’s a somewhat exclusive club – by design, HSAs are meant to pair with high‑deductible insurance plans.
Contributions
If you’re eligible, you (and your employer, if they choose) can deposit money into your HSA up to an annual limit. For 2025, the contribution maximum is $4,300 for an individual HSA and $8,550 for a family, plus an extra $1,000 “catch-up” if you’re 55 or older. [4]
These limits typically increase a bit each year. Contributions can be made as pre-tax payroll deductions (if your employer offers that) or by you directly, in which case you get to deduct the amount from your taxable income at tax time.[5] Many employers also kick in some HSA dollars as part of benefits – free money that counts toward your limit.
2025 Contribution Limits Comparison
| Account Type | Individual Limit | Family Limit | Age 50+ Catch-Up | Total (50+) |
|---|---|---|---|---|
| Health Savings Account (HSA) | $4,300 | $8,550 | $1,000 | $5,300 / $9,550 |
| 401(k) / 403(b) | $23,500 | N/A* | $7,500 | $31,000 |
| Traditional / Roth IRA | $7,000 | N/A* | $1,000 | $8,000 |
| Solo 401(k) (Employee) | $23,500 | N/A* | $7,500 | $31,000 |
| Solo 401(k) (Total)** | $70,000 | N/A* | $7,500 | $77,500 |
** Solo 401(k) total includes both employee deferrals and employer profit-sharing contributions.
† Employees aged 60–63 have a higher catch‑up limit legislated under SECURE 2.0 ($11,250 for 2025).
Investing the Funds
Here’s where an HSA starts to look like a retirement account. Money in your HSA can be invested in mutual funds, stocks, bonds, or left in cash, depending on the options your HSA provider offers. Any growth or earnings on those investments are tax-free. There’s no tax on interest, dividends, or capital gains while the money stays in the HSA. [6] This is just like an IRA or 401(k) – you don’t pay taxes yearly on investment gains. In fact, you could think of an HSA as an extra IRA that invests for your future medical needs. With that being said, it’s wise to invest HSA funds you won’t need in the near term, so they have a chance to grow.
Using the Money
You can withdraw HSA funds tax-free at any time when used for qualified medical expenses. This is the raison d’être of HSAs – you save on taxes and still get to pay for doctor visits, medications, surgeries, etc., with the money. Common qualified expenses include your health plan deductible and co-pays, prescription drugs, dental and vision care, medical supplies, and many over-the-counter items. (The IRS maintains a list; it’s pretty broad.) To tap your HSA, typically you either use a provided debit card or submit receipts for reimbursement – each HSA plan has its own process. Importantly, there’s no time limit on when you can reimburse yourself. If you pay out-of-pocket for a medical expense this year, you could let your HSA money grow and pull out funds years later to “repay” yourself, as long as you kept the receipt. This flexibility effectively lets you treat your HSA like a back-up emergency fund but also introduces risk in the sense that your investment can end up losing money.
Taxes and Penalties
If you withdraw HSA money for a non-medical reason before age 65, you’ll owe income tax and a 20% penalty – a pretty steep price. However, after age 65, the penalty goes away. Any withdrawals used for non-qualified purposes are then just taxed as ordinary income, same as a 401(k) distribution. In other words, once you hit 65, your HSA basically can act like a traditional IRA if needed – you can spend it on anything (taxable, but no penalties). And of course, qualified medical withdrawals remain tax-free at any age. It’s also worth noting that once you enroll in Medicare, you can no longer contribute to an HSA.
Portability
HSAs are individually owned accounts, not “use it or lose it,” and not tied to an employer. This isn’t a flexible spending account (FSA), so there’s no annual forfeiture. The money is yours forever. If you switch jobs or health plans, your HSA comes with you, even into retirement. You could be on your fifth employer, and the HSA opened with your first job is still chugging along. This portability makes the HSA an attractive long-term asset.
HSA Triple Tax Advantage
The only account that beats taxes three ways
Tax-Free Contributions
HSA contributions via a Section 125 cafeteria plan can dodge both federal income tax and payroll tax (FICA) when they come straight out of your paycheck. In that case, the usual 7.65 % FICA bite (Social Security + Medicare) never leaves your wallet. Contribute $4,000 while you’re in the 24 % bracket and you skip roughly $960 of income tax plus about $306 of FICA, for an immediate savings of ≈ $1,266—a richer upfront benefit than even a traditional 401(k) offers.
If you deposit the money yourself instead of through payroll, the contribution is still above‑the‑line deductible—that wipes out the income‑tax portion but not the FICA you’ve already paid.
Tax-Free Growth
The investments in your HSA grow without any tax drag. No capital gains tax, no tax on interest or dividends year to year. [6] If your HSA money is invested in a mutual fund that gains 8%, you get the full 8% working for you, not 8% minus Uncle Sam’s cut. Over the decades, this can make a sizable difference, as we’ll see below.
Tax-Free Withdrawals (for medical purposes):
When you use HSA funds for qualified health expenses, you pay zero tax on those withdrawals. It doesn’t matter if your account has doubled or tripled over time; as long as the money goes to eligible medical costs, the earnings come out 100% tax-free. This is the crown jewel of HSAs. It’s what Roth IRAs offer for retirement income – tax-free withdrawals – but the HSA offers it for medical spending on top of giving you a tax break upfront. No other account gives you this “win-win-win”.
Case Study: HSA vs. Traditional 401(k) vs. Roth IRA
Let’s run a comparison using 2025 contribution limits to see how these accounts stack up. We’ll use Sarah, a 45-year-old professional from Sarasota who’s deciding where to allocate her retirement savings. Initially in the 24% tax bracket, she contributes the maximum $4,300 of gross income to each of these accounts, assuming a 7% annual growth rate over 20 years until she’s 65.
The initial tax bite tells half the story. Her HSA captured all $4,300 through payroll deduction. The 401(k) also saw a full $4,300 contribution; FICA is withheld from her take-home pay, not the contribution itself. The Roth IRA, however, suffered double taxation—FICA plus income tax—leaving a net contribution of $2,939 from that same $4,300.
Due to her successful business, Sarah ultimately retires in a higher tax bracket than anticipated—her income now placing her in the 32% bracket. Twenty years later, the efficiency becomes clear. The HSA: $16,640, untaxed for medical use. The 401(k) becomes $11,315 after a 32% tax hit. The Roth: $11,373, protected from bracket creep.
Sarah's 20-Year Retirement Account Comparison
$4,300 gross income allocated to each account, 7% annual growth, tax brackets: 24% → 32%
The 401(k) line shows pre-tax balance until year 20, when the 32% tax hit occurs at withdrawal
After 20 Years: Real Spendable Value from $4,300 Gross Income
Sarah’s higher retirement tax bracket showcases how traditional 401(k) strategies can be less effective due to bracket creep. The HSA, however, avoids both FICA and withdrawal taxes (for medical expenses), making it a more powerful choice.
Is an HSA Right for You?
HSAs offer an almost unbeatable combo of tax benefits, investment potential, and flexibility. They work best for those who plan ahead and use them intentionally: Save diligently, invest for growth, spend wisely. It’s hard to find another account that lets your money go in tax-free, grow tax-free, and come out tax-free.
Before we finish up, let me address a question: “What if I max out my HSA and end up not needing all that money for healthcare?” Well, that’s a good “problem” to have – it likely means you stayed healthier than expected. You won’t lose that money. As discussed, after 65, you can withdraw it for anything (taxable, but no penalty), or better yet, let it cover things like Medicare or long-term care premiums tax-free. Or maybe you’ll use it for the inevitable increased health needs in your 80s or 90s. The point is, dollars in an HSA rarely ever truly go to waste. At worst, they become like traditional IRA dollars. At best, they remain completely tax-exempt and serve exactly the purpose you saved them for – your health.
Conclusion: Your Health and Wealth – Plan for Both
Since the early days of the republic, Americans have been trying to solve the puzzle of paying for healthcare while securing their financial futures. Today, you have more tools than John Adams ever did – so make sure you’re using those that make sense. If you have access to an HSA and it suits your situation, it could be your secret weapon in obtaining greater tax efficiency in retirement while helping to pay for medical expenses..
We suggest reviewing your healthcare coverage and savings approach to see if an HSA makes sense. And whether you’re already an HSA convert or still pondering, it’s wise to periodically check that your business, retirement, and estate plans are aligned toward your goals. Tax laws change, personal circumstances evolve; planning is not set-it-and-forget-it.
If you’d like an expert second opinion or a fresh look at your financial blueprint – from HSAs to 401(k)s to beyond – feel free to reach out. At WealthGen Advisors, we help clients navigate these decisions and optimize opportunities. Schedule a review with us, and together we’ll make sure you’re on course for a prosperous retirement with a sound healthcare plan. After all, true wealth isn’t just about the dollars. It’s about living well, in good health, with peace of mind for you and your family.
Sources:
- https://www.nlm.nih.gov/exhibition/phs_history/seamen.html
- https://www.peoplekeep.com/blog/bid/143476/history-of-health-savings-accounts-msas-to-hsas
- https://advantageadmin.com/2025-hsa-contribution-limits-increase-to-4300-8550
- https://www.fidelity.com/learning-center/smart-money/hsa-contribution-limits
- https://www.hsacentral.net/consumers/tax-benefits-health-savings-account
- https://wealthgenadvisor.com/how-hsas-can-help-you-prepare-for-rising-healthcare-costs/
