By Dr. Jim Dahle, WCI FounderThere's no doubt that a Health Savings Account (HSA), known around here as a Stealth IRA, is my favorite investing account, and it is the first account we fund every year. Too many people are unfamiliar with HSA law, and they don't realize just how many things you can do with an HSA. Today, we'll discuss 13 of them.
#1 Save on This Year's Tax Bill
If your only healthcare insurance plan is a designated High Deductible Health Plan (HDHP), you can make a contribution to an HSA. This year, that amount is $4,300 [2025 — visit our annual numbers page to get the most up-to-date figures]. If the plan is a family plan (often available to two spouses, two domestic partners, or a parent and at least one child), the contribution is $8,550. This amount is then subtracted from the taxable income on your federal income tax return and, in most states (excluding California, New Jersey, and any state without a state income tax), on your state income tax return. If your marginal tax rate, like mine, is in the 40%-50% range, this could save you $3,000, $4,000, or more off your taxes. That might be the equivalent of 2-4 days of work.
#2 Invest It
Many people don't realize it is possible to invest your HSA. That's right, it doesn't have to sit in a piddly little savings account paying almost nothing. All of the best investing providers allow you to invest your HSA into mutual funds, just like your 401(k). There are even self-directed HSAs that allow you to invest in real estate, precious metals, cryptoassets, and private companies in addition to any investment available at a brokerage. After making 12 years of contributions, over half of the value of our HSA is now investment returns (i.e., compound interest).
#3 Transfer It
Just as there are multiple IRA providers and brokerages, there are multiple HSA providers, and no law requires you to leave your HSA money in the place where it started. You're allowed to transfer it just like you can any other investing account. Note that a direct trustee-to-trustee transfer is slightly different than a rollover. With a rollover, the money is sent to you (minus 20% withheld by the IRS because it views this as a taxable event). As long as you get the money into a new HSA within 60 days, you don't actually have to pay taxes on it (or the 20% withdrawal penalty), but it's impossible to get all the money into the new HSA because 20% of it was withheld by the old HSA trustee. You are only allowed to do a rollover once every 12 months, too.
It's far better to do a direct transfer between trustees. There is no withholding; you can get all the money into the new account. There is no chance of a delay making the entire transfer taxable. Plus, you can do this as many times in a year as you like.
More information here:
How We Built a 6-Figure HSA (and What We Plan to Do with It)
#4 Save on Next Year's Tax Bill
An HSA is just like any other tax-protected account. As the money grows, the dividends and other income it kicks off are not taxable, so long as it remains in the account. You can buy and sell to your heart's delight, and no capital gains taxes are due. This results in your money growing faster than it would in a taxable account. Note that if you are a California or New Jersey resident, you will still need to pay state income taxes on HSA income and gains.
#5 Pay for Healthcare Tax-Free
You can take money out of your HSA at any age and use it to pay for eligible healthcare expenses tax-free. In essence, this allows you to pay for healthcare with pre-tax dollars. Using your HSA money for healthcare makes it “triple tax-free” since you got a deduction for the contribution, it grew without taxation, and you withdrew it without taxation.
#6 Save Payroll Taxes
But wait, there's more! An HSA can also be the only payroll tax-free account. Quadruple tax-free! Similar to employer contributions to your retirement account (the “match”), HSA contributions made by your employer are payroll tax-free. For this reason, even if the HSA offered by your employer isn't awesome, you may still want to fund your HSA (at least enough to get the maximum employer contribution) via employee payroll. This benefit does not exist for the self-employed (unless the business is taxed as a corporation and you are an employee-owner).
#7 Make Additional Contributions
That $8,550 limit for 2025 isn't even the limit on how much you can put in there. If you are 55+, you can put an extra $1,000 catch-up contribution into the account. If your spouse is 55+ and uses a separate HSA, they can also put in an extra $1,000. In fact, there isn't even anything special about marriage when it comes to HSA law. Many employers allow you to put a domestic partner on your health plan with you.
Remember that the only requirement to make a family-size HSA contribution is to be covered by a family HDHP. If you are covered by a family HDHP, you can make a family-size HSA contribution. Since your domestic partner is also covered by a family HDHP, they can also make a totally separate family-size HSA contribution to their own HSA. That's not the case if you're married with separate HSAs. If you're married, you have to share (actually split) one family contribution limit between your two HSAs. If there is a child on one of the plans, the family contribution can all go into a single plan, but there is no double-dipping like there is for domestic partners. A bit of a marriage penalty there.
Another form of additional contribution occurs for your adult, non-dependent children covered by your family HDHP. Since they are covered by a family HDHP, they can make THEIR OWN family-size contribution to THEIR OWN HSA. Unlike a retirement account contribution, this doesn't have to be earned income that is contributed. You can gift them the money if you want. Just make sure your total gifts to them stay within the annual gift tax exclusion amount ($19,000 in 2025) so you don't have to hassle with a gift tax return. Using this technique between ages 19-26, I figure you can gift your child a seven-figure HSA.
More information here:
Which Is the Best HSA? Lively vs. Fidelity Review
The Best Way to Track Your HSA Receipts
#8 Divorce the Spending from the Withdrawal
Under current law, there is no rule that you must make the withdrawal from the HSA in the same year in which you spend the money on healthcare. This loophole allows the “save receipts” strategy, where one can keep receipts (scan, digitize, and carefully file these in case you're audited) for years or even decades, allowing the money to continue to compound tax-free before being withdrawn. You can only withdraw the nominal amount equal to the original expense tax-free, not the compound interest on that principal, but that additional tax-protected growth can be really valuable if you can afford to pay your healthcare expenses from your current cash flow.
#9 Pay for Medicare
While you generally can't pay for health insurance premiums—even health insurance bought through a government “Obamacare” exchange with HSA money—Medicare is an exception. You can use HSA dollars to pay Medicare premiums, deductibles, co-pays, and co-insurance for Medicare Parts B, C (Medicare Advantage), and D but not Medigap (Medicare Supplement insurance). Many people don't realize that Medicare has premiums until they turn 65 and start seeing them withheld from their Social Security check. You can reimburse yourself for these using your HSA, a great use for an “overfunded” HSA.
#10 Buy a Boat
HSA money doesn't have to be spent on healthcare. You can spend it on anything you want. If you have enough past healthcare receipts to “cover” the withdrawal, you can even spend it on a boat tax- and penalty-free. However, even if you didn't do the save receipts strategy, you can make HSA withdrawals at any time and use them to buy a boat penalty-free (but not tax-free) once you turn 65. In this respect, the tax treatment is exactly like that of your tax-deferred 401(k) or IRA. This is why an HSA is often called a “Stealth IRA.” Even at its worst, it's still as good as your other retirement accounts. Thus, there is no reason not to maximally fund your HSA and let it grow as large as you want. There really is no such thing as an “overfunded” HSA, because it unofficially turns into an IRA at age 65.
#11 Give to Charity
Don't need the money for healthcare or a sailboat? You can give HSA money to charity either before or after death. While there isn't an additional deduction for doing so, there is no tax cost either. Essentially, you've donated pre-tax money to your favorite charity. There is no penalty either.
#12 Buy Things You Might Not Think of as Healthcare
The list of eligible HSA expenses is a lot bigger than you might think. All of the following (and more) are eligible to be paid for with HSA dollars.
- Hand sanitizer/masks
- Over-the-counter medications
- Acupressure/Acupuncture
- Feminine hygiene products
- Eyeglasses/contacts/guide dogs
- Special education expenses
- Weight loss program (for a specific illness like obesity)
- Massage (for a specific ailment)
- Orthodontics
- Fertility treatments
- Athletic braces and tape
- Car or house modifications for a medical need
More information here:
Beware! An HSA Is Great But . . .
#13 Stiff Creditors
In 10 states, your HSA, like your retirement accounts, is protected from creditors even if you are forced to declare bankruptcy. These states include:
- Florida
- Indiana
- Minnesota
- Mississippi
- Montana
- Oregon
- Tennessee
- Texas
- Virginia
- Washington
The Bottom Line
Rather than being an insignificant part of your financial life, an HSA can be a very flexible and advantageous addition to your portfolio. That's why it's my favorite.
What do you think? Which of these things do you do with your HSA? What else can you do with an HSA?
One thing you could point out in #9 is that an HSA can be used to reimburse you for your IRMAA “tax”.
IRMAA (Income-Related Monthly Adjustment Amount) is just an additional Medicare Part B and Part D “premium”. It is not a tax.
Sure feels pretty similar though!
And thanks for the IRMAA info. Not sure I realized that was HSA eligible and we’re very likely to be paying a lot of it.
When considering #7. The adult, non dependent child covered by the family HDHP, the child is eligible for a separate plan family size contribution, how does a parent use pre-tax dollars to gift to their child? What are the accounting and tax implications for the parent.? Assuming there are no gift tax concerns.
The parent has “no” ability to use pre-tax dollars to gift to the child. Gifts by definition are post-tax dollars. The only accounting or tax implications for the parent are any gift tax implications the same as any other gift.
The adult non-dependent child is an HSA eligible individual. They may open their own HSA account with their own family contribution limit and their own ability to deduct any contributions. The adult non-dependent child “solely” receives all the benefits just like any other HSA eligible individual.
They’re kid pre-tax dollars. The parent doesn’t get a deduction for that gift.
Would you recommend maxing out your HSA before paying additionally on your student loans?
Forgive me for sounding like a comprehensive financial planner but….it’s impossible to answer that question without A LOT more information about your mathematical and emotional goals and realities.
In a vacuum I would say – Yes, probably
You are really asking a question about cash flow prioritization which is addressed in the “Tax Efficient Waterfall” conversation:
https://www.whitecoatinvestor.com/financial-waterfalls-for-new-residents-and-attendings/
Depends on your goals, but if you’re on track to meet your student loan goal, an HSA is a great first place to invest because it’s the only triple tax free account.
I’m a Californian who has been contributing to an HSA for several years now and I’ve wondered if those dollars wouldn’t be better off in a good ol’ taxable account. Is there any reason to think that the tax treatment for HSAs in California and New Jersey will change to align with the rest of the country?
There is no reason I know of to believe the rules will change anytime soon for California and New Jersey residents.
That said, if you optimize the HSA strategy (max it out, invest it, don’t spend it, save the receipts, etc) then those dollars are almost certainly going to be better off in the HSA than the taxable account even without saving taxes at your state marginal tax rate.
Federal tax deductibility along with tax free growth and tax free withdrawals are very valuable.
Thanks Tyler. Yep, I’ve never spent a cent out of the account, it’s fully invested, and I’m keeping all my receipts for some far off day. . .
Well, they’re certainly not nearly as good in CA and NJ as elsewhere but as bad as CA taxes are, federal taxes are still worse. No idea if that will change any time soon. Why not write your state legislators?
I contributed the max to an HSA since 2005. I spent the money on legitimate medical expenses along the way. There were many years I was a high earner & healthy such that health care expenses were minimal & paying them out of pocket wouldn’t have presented much difficulty most of that time. Now that i’m eyeing the door I wish I had parked those funds for 10 or 15 years in a index fund. Where would I be today ? Likely a healthy 6 figure account balance to use to pay healthcare costs at a point where there’s less wage income & rising health related expenses. For younger folks in a similar situation perhaps a strategy worth considering.
It’s a hard balance for sure. I’m not sure we got it right given our quarter million dollar HSA. Maybe we should have spent more from it as we went along. We’re not that good at saving receipts it turns out.
Great article, HSAs are the best! We’ve chosen Lively as our administrator and invested half of our 30k in CDs and half in VOO through Lively’s partner Charles Schwab.
Sadly, once Medicare eligibility arrives, there is no vehicle for continuing to contribute to the program, even if you are still working.
There was an option for an MSA through Medicare Advantage when I turned 65 in 2019. CMS would fund my HDHP the first of each year and I saved over 15k , until the option was eliminated. I suspect the Medicare Advantage provider couldn’t make money on healthy customers and they eliminated it. That’s how it works.
https://www.morningstar.com/financial-advisors/how-preserve-your-hsa-eligibility-beyond-age-65
Thank you for the link but my husband’s company would not allow him to be on their HDHP even though he wasn’t yet on social security or Medicare.
He will retire this year and begin Medicare. Most importantly, it would be wonderful to see an MSA again during open enrollment this fall.
I was able to reimburse all of my Medicare part B expenses (currently $185.00 per month), taken from my social security payment each month, when I had the MSA. In my opinion, there was nothing better, ever, in our healthcare system.
Interesting. Hadn’t ever considered NOT applying for Medicare at 65. Not sure it’s worth it for most just to be able to contribute to an HSA, but I guess you just have to run the numbers for yourself like most things.
Here is how I plan to use my HSA to pay for health care insurance premiums if I retire early before medicare kicks in. I have been using #8 where I invest all my HSA contributions and then save receipts for all my qualified health care expenditures. Eventually, I’ll have a good chunk of money in saved receipts and can pull an equivalent amount of money out of my HSA tax free and spend it on whatever I want. However, if I retire early, I plan to use that money to pay for health care insurance premiums. And I can still use the rest of the HSA money for qualified health care expenditures.
Insurance premiums are not an HSA eligible expense. Medicare and COBRA are notable exceptions.
If I have a HDHP for my family and myself and we also secondary health insurance, can I still contribute to a HSA?
No. The HDHP must be your ONLY coverage in order to contribute to an HSA.
Via email:
This is a great list. One more item to consider mentioning –
Assuming one is HSA eligible, there is a one time transfer from your IRA to HSA allowed called a “qualified HSA funding distribution”. This is potentially a great option for helping to reduce the amount in an IRA while simultaneously making your HSA contribution for the year.
https://www.irs.gov/publications/p969.
This is a great idea for those who know they will spend the money on health care.
From Peter G but misposted elsewhere:
Stepping back from the impressive detail and mental energy expended here for a moment, I ask you to consider 2 words: “Single Payer.”
Seriously, if this is this complicated and even doctors with all of our education and smarts have to go through all of these machinations to figure out our best options, how do you think most other people are going to figure it out? The cost and anxiety of this are far outweighed by the benefits we’d get by having a single set of rules, EVEN if they were less favorable to certain individuals in the end (as they would likely be). Not to mention the benefits to the entire country of risk pooling, lowering premiums and costs for the sickest among us, who need the most help. Seriously my main thought as I tried to wade through this post was “isn’t this ridiculous?” Certainly anyone from any other industrialized wealthy country would have this reaction. Someday when rationality is (albeit probably only partially) restored to governance, we will have another shot at voting something like this in, and we shouldn’t miss the opportunity (again).
I have an HSA eligible plan that I chose on my own; not workplace sponsored. I direct deposit my paycheck into my HSA account at a local credit union. There is no box to check through payroll to identify it as an HSA account. I asked as part of the setup process with our new payroll system if there was a way to identify it as an HSA savings account, not a regular savings account. The rep was unsure how to best identify it. Any advice on how to signify the HSA account is different to get the payroll tax savings?
Why use an HSA at a local credit union instead of something like Fidelity or Daffy with far better investment options?
If the employer isn’t running your HSA contribution through payroll into their chosen HSA, you can’t just go do that on your own. Sorry.