Why not save for medical expenses and retirement at the same time?
Many retirement accounts provide tax advantages. A qualified retirement account (e.g., 401(k)) provides tax-deductible contributions and tax-deferred growth; a Roth IRA provides tax-free growth and tax-free withdrawals.
There’s no account available under the IRS code that offers a federally approved triple-tax advantage, except for the HSA.
What is an HSA?
A Health Savings Account, or HSA, is a tax-advantaged account available to individuals enrolled in a High Deductible Health Plan, commonly referred to as an HDHP. The basic premise is straightforward — you contribute money to the account, and you can use it to pay for qualified medical expenses tax-free. The contributions can be invested in different assets, similar to a retirement account.
As mentioned above, it is the only federally approved, triple-tax-advantaged account available. So what are the three tax advantages?
1. Your contributions are tax-deductible. Money you put into an HSA reduces your taxable income in the year you contribute — just like a traditional IRA or 401(k).
2. The money grows tax-free. Any investment gains inside the HSA are not taxed while they remain in the account.
3. Withdrawals for qualified medical expenses are completely tax-free.
No other account in the tax code gives you all three of these benefits simultaneously. A traditional 401(k) gives you the deduction going in, but taxes you on the way out. A Roth IRA gives you tax-free growth and withdrawals, but no deduction going in. An HSA provides all three.
The contribution limits
For 2025, you can contribute up to $4,300 if you have self-only HDHP coverage, or $8,550 for family coverage. For 2026, those limits increase to $4,400 for self-only and $8,750 for family coverage. If you are 55 or older and not yet enrolled in Medicare, you can contribute an additional $1,000 as a catch-up contribution in both years.
To be eligible, your health plan must meet the IRS definition of an HDHP. For 2026, that means a minimum annual deductible of at least $1,700 for self-only coverage and $3,400 for family coverage, with out-of-pocket maximums of $8,500 and $17,000, respectively.
The difference between an HSA and an FSA
An HSA and an FSA are at times used interchangeably. A Flexible Spending Account (FSA) is an optional employee benefit that allows you to contribute to the account through salary deduction. During the enrollment period, you declare how much of your salary you would like to contribute (maximum contribution is $3,400 for 2026). That money can be used for qualified medical expenses throughout the year. Since you are deducting the amount from your salary, the IRS does not tax you on that money.
Funds are typically tied to an FSA-specific debit card, or expenses can be submitted for reimbursement.
Contributing to an FSA also reduces your taxable income. For example, if you make $60,000 and contribute $3,000 towards your FSA, your taxable income is reduced to $57,000. Essentially, you are receiving a discount on the medical expenses for the year. That could be anywhere from $200 – $300 savings for every $1,000, depending on your tax bracket.
An FSA is typically a “use-it-or-lose-it” account. You must utilize the funds in the account by the deadline that is set by your employer. If you don’t use the funds, the funds disappear. There are some exceptions, and some employers offer FSA accounts, which allow you to roll over a certain amount to the next year.
While the FSA offers tax advantages and savings on medical expenses, it requires you to estimate your medical costs upfront for the year. This can be tricky. Unless you have a medical condition, no one is anticipating getting sick or having high medical bills. In my experience with an FSA, I always found it challenging to project my expenses. If you under-estimate, you aren’t getting all the savings you could. If you overestimate, you have money that will potentially go to waste.
Additionally, an FSA account does not allow you to invest your contributions.
While an FSA can be a great option for those whose employers offer it, it has some key differences from an HSA.
Spending your HSA like an FSA
Where many people go wrong is treating their HSA like an FSA
To truly take advantage of the tax benefits, you need a different approach. Most people view their HSA as money to spend throughout the year on medical expenses — and technically, they’re not wrong
However, every dollar you pull out of your HSA today is a dollar that can no longer compound and grow over the next 10, 20, or 30 years.
In an ideal world, if you can afford it, you would pay your medical expenses out of pocket and let your HSA grow over time. Each year you do that, the balance compounds. By the time you retire, that account can represent a significant pool of tax-advantaged money ready to cover what will likely be one of your largest retirement expenses — healthcare.
Most do not view the HSA account as a type of retirement account, and I think that’s a mistake.
It can be difficult not to touch the money in the account. When a medical bill arrives, the instinct is to reach for the money already set aside for that purpose. I have felt that pull. It can be difficult for me to defer using those funds until retirement. But an HSA should be thought of as a long-term play, like any retirement account. And if circumstances ever require you to tap into it, the funds will be there.
So much of the retirement “game” is having discipline when your impulse tells you otherwise. It is delaying comfort and convenience in favor of the long-term goals you have set for yourself.
What happens at retirement
Once you turn 65, the HSA essentially becomes a traditional IRA. You can withdraw money for any reason — not just medical expenses — without penalty. You will pay ordinary income tax on non-medical withdrawals, the same as you would with a traditional 401(k) or IRA. If you withdraw funds before you turn 65 for non-medical expenses, you will also face a 20% penalty on top of paying ordinary income tax.
But for qualified medical expenses, withdrawals remain completely tax-free at any age.
One additional benefit worth knowing — unlike a traditional 401(k) or IRA, the HSA is not subject to required minimum distributions (RMDs). The IRS requires traditional retirement plans to begin withdrawals at age 73. For HSAs, the money can continue to sit and grow for as long as you want, giving you even more flexibility in retirement.
Qualified medical expenses from prior years are eligible for reimbursement from your HSA. For example, if you had a surgery when you were 35 for which you paid out of pocket, you can use HSA funds when you are 65 to reimburse yourself. The caveat is that those medical expenses must have occurred after you opened your HSA account.
The HSA may not be for everyone
Realistically, not every founder is in the right situation for an HSA. To open one, you need to be enrolled in a High Deductible Health Plan, and for some, that can be nerve-racking. If you have young children who require frequent medical attention, or if you have ongoing health conditions that generate consistent out-of-pocket costs, a high deductible plan may expose you to more risk than the tax benefits are worth.
Each situation is unique, and it is important to look at your own health and financial picture before making a decision.
That said, if you are generating enough personal income from the business to weather a costly medical year and are looking for every available tax-advantaged account to build long-term wealth, the HSA should be considered as part of your overall financial strategy. For founders in particular, already navigating retirement planning without the built-in structure of a corporate benefits package, the HSA is another powerful tool that’s easy to set up.
A simple checklist to get started
Step 1 — Confirm you are enrolled in an HSA-eligible High Deductible Health Plan. Look for the “HSA-eligible” label on your plan documents during open enrollment.
Step 2 — Choose a financial institution to open your HSA. Fidelity, Schwab, and Vanguard all offer HSAs with investment options.
Step 3 — Open the account and set up a contribution schedule. You can contribute any time during the calendar year up to the tax filing deadline the following April.
Step 4 — Invest the balance. Do not let it sit in cash. Most HSA providers allow you to invest in low-cost index funds once the balance reaches a certain threshold.
Step 5 — Pay medical expenses out of pocket if you can. Keep your receipts. As stated earlier, there is no time limit on when you can reimburse yourself from the HSA for qualified medical expenses.
*This is not meant to be tax, investing, or medical advice and is for general information purposes only.
Did you know?
A 65-year-old retiring in 2025 can expect to spend an average of $172,500 on healthcare and medical expenses throughout retirement — more than double Fidelity’s inaugural estimate of $80,000 in 2002.
Something to ponder…
Have you thought about how you will pay for healthcare costs in retirement?
Eager to learn if an HSA is appropriate for your situation? Schedule a free consultation with Texel Compass, and we’ll help you decide.