How to Make the Most of Your Health Savings Account (HSA)

Health savings accounts (HSAs) are smart ways for people with high-deductible health plans (HDHPs) to pay for medical expenses. But they can also support substantial wealth accumulation for savvy investors who use them strategically. Here’s what you need to know.

Understanding the triple tax advantage

The HSA’s appeal comes from what’s known as the triple tax advantage:

• Your contributions to an HSA are tax-deductible.
• Any gains in the account can grow tax-deferred.
• Withdrawals for qualified medical expenses are tax-free.

Other tax-advantaged accounts, such as IRAs or 401(k)s, offer two of these tax benefits, but not all three. In traditional retirement accounts, your contributions are deductible, while you pay taxes on withdrawals. For Roth accounts, the benefits are reversed: You make contributions with after-tax dollars and then make withdrawals tax-free.

By offering all three tax advantages at once, HSAs can make for an extraordinarily efficient wealth-building tool for those who know how to use them.

Use your HSA as an investment account

Many HSAs have another key feature: While your contributions are deposited into a cash account by default, you can opt instead to invest some or all of the balance—potentially earning a return much greater than the interest rate available on cash deposits. With this feature, your HSA becomes more than just a cash reserve for medical expenses; it also becomes a new way to supplement your retirement savings.

Once you reach age 65, withdrawals for non-medical purposes are simply taxed as income—just like your withdrawals from traditional 401(k) accounts and individual retirement accounts. Withdrawals for qualified medical expenses continue to be tax-free. (Prior to age 65, withdrawals for anything besides qualified medical expenses are taxed as income and incur a 20 percent penalty.)

Despite the potential benefits, few HSA holders take advantage of this option. The Employee Benefit Research Institute found that only 15 percent of account holders invested their HSAs in assets other than cash. That means that 85 percent are not taking full advantage of the tax-deferred growth potential an HSA offers.

In 2026, people with self-only coverage under an HDHP can contribute up to $4,400 to an HSA—a potentially meaningful addition to your retirement savings over time, especially considering the potential for compound growth. Those with family coverage can contribute up to $8,750. Starting in the year in which you reach age 55, you can also make a $1,000 catch-up contribution (doubled for a family plan in which both spouses are 55+).

HSA providers’ investment options often include target date funds, index funds, actively managed mutual funds and individual stocks. Your financial advisor can help you determine how best to invest your HSA funds in coordination with the rest of your financial plan and your risk tolerance. Your advisor can also help you maximize tax efficiency by deciding which investments to hold in your HSA and which to hold in other accounts.

Use HSA investments to maximize flexibility

To get the most out of an HSA investment strategy, you’ll want to max out your annual HSA contributions and then cover any medical expenses out of pocket. This approach allows you to keep your entire HSA balance invested so you can benefit from tax-advantaged compounding for as long as possible.

Because the IRS doesn’t impose a deadline for reimbursing yourself for qualified medical expenses, you can take this strategy even further. As you cover your medical expenses with cash flow, it’s smart to document them by keeping receipts, explanations of benefits and any other documentation showing that the costs incurred were qualified medical expenses. Then, sometime in the future, you can make tax-free withdrawals to reimburse yourself.

Here’s how that might work. You incur a $5,000 medical expense. But instead of drawing from your HSA, you pay for it from your checking account. Make sure you save the documentation that shows how much it cost and what it was for. Then, 10 years later, you need funds to cover a vacation, home upgrade or another purpose. Or maybe you just want to supplement your retirement income. As long as you have the documentation, you can withdraw $5,000 tax-free as a reimbursement for that decade-old medical bill.

With this strategy, you can effectively enjoy the triple tax advantage of an HSA for both health care costs and other expenses. This can ultimately help you create a more tax-efficient retirement plan.

Other HSA planning considerations

To qualify for an HSA, you need to be enrolled in an HDHP. (To qualify as an HDHP in 2026, a plan must have a deductible of at least $1,700 for self-only coverage, or $3,400 for family coverage.) That requirement may feel restrictive, but many families find the trade-offs are worth it. For example, if you already choose to self-insure for smaller expenses and long-term risks, the high deductible will have less impact on your cash flow. Plus, you can divert into HSA contributions the money you save in premium payments by maintaining an HDHP.

To use this strategy effectively, you need reliable cash flow or substantial reserves that will allow you to cover unpredictable medical expenses out of pocket. You also need organizational discipline. If medical expenses go unrecorded or receipts disappear, you may lose the opportunity to make tax-free reimbursements later. Talk with your advisor or tax professional about how to set up a consistent system for documentation and long-term record keeping.

When it comes to end-of-life planning, it’s important to understand that, unlike IRAs, HSAs transfer to surviving spouses without tax consequences and with their original status and benefits intact. By contrast, non-spouse beneficiaries receive a taxable payout equal to the account’s fair market value. If the account holder has unreimbursed medical expenses, their estate can claim them for a final tax-free withdrawal.

Strengthen your financial plan with an HSA investment strategy

Investors who want to strengthen their financial plan with advanced tax planning and retirement savings strategies may want to consider using an HSA as a core investment vehicle. The combination of a triple tax advantage, compound growth opportunities and the option to increase flexibility by delaying reimbursements can make it a potentially powerful addition to your portfolio.

If you’d like to explore strategies for maximizing an HSA, your Northwestern Mutual financial advisor can help. Reach out to discuss whether your financial plan could benefit from implementing an HSA strategy like this.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.