Health savings account (HSA)
A tax-advantaged account for medical expenses, available with an HSA-eligible health plan, that can also act as a retirement account.
Explanation
To contribute to an HSA you need coverage under an HSA-eligible health plan, traditionally a high-deductible health plan (HDHP), and no other disqualifying coverage such as Medicare. Starting in 2026, bronze and catastrophic marketplace plans also qualify. Once you enroll in Medicare, you can no longer contribute, but you can keep using the money.
The tax treatment is unusually generous:
- Contributions are deductible, and if made through payroll they also avoid FICA taxes.
- Growth is tax-free while invested.
- Withdrawals for qualified medical expenses are tax-free at any age.
Non-medical withdrawals before 65 are taxed as income plus a 20% penalty. After 65, they are taxed as ordinary income with no penalty, the same as a traditional IRA. There is no time limit on reimbursing yourself: you can pay medical bills out of pocket now, save the receipts, and withdraw the same amount tax-free years later, letting the money grow in the meantime.
The 2026 contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, plus $1,000 at age 55 or older. A couple of states, notably California and New Jersey, do not follow the federal treatment and tax HSA contributions and earnings.
In scenarios, an HSA can be modeled as a separate account used for health costs in retirement, or treated as an extra traditional-like account.
Example
A family in the 22% federal bracket contributes the 2026 maximum of $8,750 through payroll.
- Federal income tax saved: $8,750 × 22% = $1,925.00
- FICA saved (7.65%): $8,750 × 7.65% = $669.38
- Total first-year savings: $2,594.38, before any state tax effect
If they invest it and it grows at 6% for 20 years, it becomes $8,750 × 1.06^20 = $8,750 × 3.2071 = $28,062, all of which can be withdrawn tax-free for medical expenses.