How to Turn Your HSA into a Tax-Free Retirement Account

The HSA—or Health Savings Account—is a wunderkind of the tax code.

• The HSA is different from the 401(k) as a tax savings vehicle because—if you make payroll contributions—you don’t pay the 7.65% FICA tax on them.

• The HSA is the only investment vehicle that has the potential for funds to go in tax-free, be invested and grow tax-free, and come out tax-free, if they’re used for qualified medical expenses.

• If you don’t end up using the money for qualified medical expenses, your HSA functionally morphs into an IRA when you turn 65, making it a wonderful complement to your other retirement accounts later in life. (You’ll pay taxes on your distributions like you would with a Traditional IRA if you don’t use them for medical expenses, but there aren’t any penalties for doing so.)

• Lastly, there are no required minimum distributions! While the government might force you to begin taking withdrawals from your other pre-tax accounts after age 73 depending on the balance, the HSA isn’t subject to these.

If your company’s healthcare plan is HSA-eligible, drop everything you’re doing and start contributing to it. Yesterday. Do not sleep on the Health Savings Account!

Let’s back up, shall we? If you’re like, WTF is an HSA and WHY should I care, allow me to cover the basics.

If you have a high-deductible health insurance plan, you’re eligible for a Health Savings Account. The HSA is a tax-free vehicle intended to be used for medical costs. Let’s say you hit up the dermatologist and your health insurance is all, “Deal with your acne yourself!” You can use funds in your HSA to pay for your zit cream.

There are some obvious tax benefits to utilizing your HSA, and I’ve found myself grilling both friends and coworkers about whether or not they’re maximizing this hidden gem.

​For one thing, the money you contribute reduces your taxable income. As of 2025, the HSA contribution limit for an individual is $4,300—so if you put $4,300 in your HSA, it reduces your salary (in the eyes of the IRS) by that much. If you’re someone who’s right on the cusp of a higher tax bracket, this might be a good way to skirt the higher tax dig.

Moreover, the money you put in goes in tax-free, grows tax-free (because you can invest the funds inside it), and comes out tax-free (so if you’re like, Hey, I’m going to pay for this zit cream with my money either way, this is a way for you to avoid paying ANY TAXES on that money).

But let’s say you’re someone who literally never has health issues. UTIs? Never heard of them. Glasses? 20/20 vision. You’re the walking picture of health.

Two things:

1. You probably won’t ALWAYS be, so any money you save in this account can be used for medical expenses 30 years down the road because you tweak your back playing with your pet robot (not to be confused with the FSA, which resets every year and is a raw deal, in this reporter’s opinion).

2. I reiterate: If you retain your invincible status to old age, once you’re 65, the HSA functions like a Traditional IRA (Individual Retirement Account) and withdrawals will be taxed in your tax bracket when you take it out (but it went in tax-free and GREW tax-deferred, which is #YUGE).

It’s a win/win.

You don’t have to contribute anything crazy—definitely take care of your 401(k) and contribute up to your company match first (and if you’re not doing that, start doing it—last week).

But if you’ve got a few extra hundred bucks hanging around each month in your checking account, direct them to your HSA instead so they can grow and help you avoid taxes. Woohoo! #FederalGovernmentWho?

The HSA is also the reason why high-deductible plans can end up being net-cheaper than low-deductible plans, even if you end up hitting your deductible. More here.