What Is a Health Savings Account (HSA) and How Does It Work?

A Health Savings Account (HSA) is a tax-advantaged account you can use to pay for qualified medical expenses. But it's much more than that — when used strategically, an HSA is one of the best wealth-building tools available, offering a tax benefit that no other account matches.

The Triple Tax Advantage

HSAs are unique because they offer three separate tax benefits:

• Contributions are tax-deductible (reduces your taxable income now)
• Growth is tax-free (investments inside the HSA grow without taxes)
• Withdrawals for medical expenses are tax-free

No other account in the U.S. tax code offers all three. A 401(k) gives you the first two. A Roth IRA gives you the last two. An HSA gives you all three — if used for medical expenses.

Who Qualifies for an HSA?

To open and contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). For 2026, the IRS defines an HDHP as:

• Individual coverage: Deductible of at least $1,650
• Family coverage: Deductible of at least $3,300
• You cannot be enrolled in Medicare
• You cannot be claimed as someone else's dependent

2026 HSA Contribution Limits

• Individual coverage: $4,300/year
• Family coverage: $8,550/year
• Age 55+: Additional $1,000 catch-up contribution

What Can You Use HSA Money For?

Qualified medical expenses include:

• Doctor visits and specialist co-pays
• Prescription medications
• Dental care (fillings, extractions, braces)
• Vision care (glasses, contact lenses, LASIK)
• Mental health services
• Hospital stays and surgery
• Over-the-counter medications (since 2020)

After age 65, you can withdraw HSA funds for any reason without penalty — you'll just pay ordinary income tax on non-medical withdrawals, making it function like a traditional IRA.

The HSA Investment Strategy

Most people use HSA money immediately for medical costs. But the smarter long-term strategy is:

1. 1Contribute to your HSA
2. 2Invest the funds in low-cost index funds inside the HSA
3. 3Pay current medical bills out of pocket (save your receipts!)
4. 4Let the HSA grow tax-free for decades
5. 5Reimburse yourself for old medical expenses anytime (there's no time limit)

How to Open an HSA

• Through your employer (if your employer offers HDHP coverage)
• Directly through an HSA provider like Fidelity, Lively, or HealthEquity
• Fidelity HSA has no fees and access to full investment options — it's the top choice for most people

HSA vs FSA: Key Differences

• HSA: Rollover every year — money never expires. FSA: Use it or lose it by December 31 (some plans allow a small rollover)
• HSA: Portable — you own it, not your employer. FSA: Employer-owned — you lose it if you change jobs
• HSA: Can be invested in stocks and mutual funds. FSA: Typically sits in cash earning near-zero interest
• HSA: Requires HDHP enrollment. FSA: Available with any health plan