Health savings accounts are one of the best ways to save on medical expenses. But new research suggests many people aren’t taking full advantage of one of the account’s biggest benefits.
HSAs offer what’s known as a “triple tax advantage”: Contributions are made with pre-tax dollars, investments grow tax-free and withdrawals for qualified medical expenses are also tax-free. The combination of tax-advantaged treatment and the compounded growth of interest earned on investments make them a powerful long-term savings tool.
Yet a new survey from the Employee Benefit Research Institute (EBRI) found that nearly two-thirds of HSA owners are using the accounts to pay for current or near-term health care expenses instead of building up savings for their older (and often more expensive) years.
For people who can’t afford to leave money untouched, that can mean giving up years of tax-free growth before they can finally use those funds to pay for eligible expenses in retirement.
Most HSA owners focus on today’s medical bills
For most people, an HSA is not part of a long-term retirement plan. More than half of respondents (54%) to the EBRI survey said they opened an account because their employer put money into it, making employer sponsorship the most common reason for signing up in the first place.
Interestingly, the survey also suggests that tax benefits may be less of a motivator. A few respondents cited the tax benefits of HSAs as a reason to open earlier than 2024, as account balances have continued to grow.
Health savings accounts are available to people enrolled in premium health plans. Although most employees gain access to an HSA through their employer, it is possible to open one independently. That usually happens if you’re enrolled in an HSA-eligible health plan and don’t have other coverage that disqualifies you, such as Medicare, Medicaid or other health plans. You will also not be wanted as a dependent.
Once the account is open, research suggests that most people use it as a checking account for health care expenses as they arise, covering everything from doctor visits and prescriptions to other out-of-pocket medical expenses. Given the high cost of health care, that’s understandable. Many families simply need access to those funds today.
However, that approach may cause some savers to miss out on an opportunity to prepare for one of the biggest retirement expenses. Fidelity estimates that a 65-year-old retiring this year could spend an average of $185,500 on health and medical expenses during retirement.
Why an HSA is a powerful retirement account
Unlike most retirement accounts, an HSA is designed specifically for health care spending — and its tax treatment makes it especially valuable for future medical expenses.
“The HSA is the only account in the tax code that doesn’t pay taxes on both ends,” says Geoff Schmidt, a certified public accountant and founder of Holy Schmidt, a retirement education center. “The Roth gives you one end, the 401(k) gives you the other [and] an HSA provides both.”
To clarify that further: With a traditional 401(k), you typically get an upfront tax break when you contribute, but pay taxes when you withdraw. With a Roth account, you contribute after-tax money, but qualified withdrawals are tax-free. An HSA combines both benefits, allowing contributions and withdrawals to be tax-free.
Unlike a flexible spending account (FSA), you don’t have to rush to use your HSA before the end of the year. Instead, the balance is tipping. Many HSA providers also allow account holders to invest their balance in mutual funds or other investment accounts, although some require a minimum cash balance before investing. Over time, those invested funds have the potential to earn higher returns than money sitting in cash, allowing HSA balances to grow beyond new contributions while maintaining tax benefits.
However, few people use that feature. Only about 10 percent of HSA accounts are actually invested by the end of 2025, up from 7 percent by 2023, according to Devenir, an HSA investment firm. Those invested accounts hold about half of all HSA assets, suggesting that people with large balances are more likely to invest their HSA savings for the long term.
Most people probably don’t get to that point because they look at the account as a place to withdraw money for the next expense – which is another common way people miss out on the real benefits of these accounts.
“People think an HSA is a spending account,” Schmidt said. “The name says savings, but the pipes say checking. You get a bank card, and consumer behavior follows the bank card.”
For employees who have enough money to pay medical bills quickly, another strategy is to pay those expenses out of pocket instead of withdrawing money from an HSA immediately. By saving the receipts, they can leave those HSA dollars invested — giving them more time to potentially grow — and pay them back tax-free years or even decades later.
“The caveat is that this takes a literary discipline that most people don’t keep for two decades,” Schmidt added. “If you can’t produce a receipt in 2046, the strategy was theoretical.”
However, the long-term savings method is not suitable for everyone. If paying off a doctor’s bill directly means pulling out of your emergency savings or taking out high-interest debt, using HSA funds may be a better financial decision.
“If paying off a $4,000 medical bill out of pocket means you’re carrying it on the card at 22%, you’ve just lost a 7% growth account protection fee,” Schmidt said. “The numbers don’t work no matter how well the tax is managed.”
Ultimately, the best strategy depends on your financial situation and stage of life. Using HSA money for current medical expenses is exactly what the account is designed for. But for people who can comfortably pay those costs out of pocket, leaving HSA dollars invested can provide a tax-efficient way to prepare for major health care expenses later in life. Someone approaching Medicare eligibility, for example, has less time to benefit from long-term investment growth than a worker with decades until retirement.
