I was naturally skeptical when I first learned about health savings accounts (HSAs) and their benefits. If you're familiar with HSA's cousin, the flexible spending account (FSA), you know that it wasn't very flexible and punished anyone who may have saved “too much” by forfeiting the balance to the IRS at the end of the year. While many appreciated this product, I felt it was a bad deal because I was never good at predicting the future.

When the HSA was introduced, I assumed it would function like an FSA, but that was a mistaken assumption. If you haven't yet taken the time to learn about the benefits of HSAs, it's worth your time—and money—to explore them further.

What is the purpose of an HSA?

An HSA (Health Savings Account) is a savings account that enables you to set aside income for future qualified medical expenses. Since a High Deductible Health Plan (HDHP) typically has a significantly higher deductible and maximum out-of-pocket limit, you may face greater financial exposure to healthcare costs. The primary purpose of this savings account is to help you cover your medical expenses without resorting to debt.

Am I eligible to open an HSA?

Before exploring the benefits of owning a Health Savings Account (HSA), it’s essential to understand your eligibility to open one. To open and contribute to an HSA, you must be enrolled in a high-deductible health care plan (HDHP). While many businesses are transitioning their employees to these lower-premium healthcare plans, a significant number of individuals still have traditional premium plans. You can contact your insurance provider to verify whether you are enrolled in a qualifying HDHP.

How is the HSA different than a regular savings account?

If a Health Savings Account (HSA) is simply a savings account, you might wonder what advantages it offers over a regular savings account. The answer is yes—there are several significant advantages.

Firstly, contributions made to your HSA can be deducted from your taxable income. Every dollar you contribute reduces your taxable income, which can lead to substantial tax savings. Moreover, many employers offer the option to automatically deduct your HSA contributions from your paycheck, allowing you to benefit from these tax advantages immediately.

Additionally, the money in your HSA can be invested and grow tax-free. This distinguishes the HSA from regular savings accounts and taxable brokerage accounts, where any distributions are subject to capital gains tax. Because HSAs allow for tax-free growth on your tax-deductible contributions, they effectively serve as a kind of retirement account.

Furthermore, HSAs have an advantage over traditional retirement accounts: you can use the funds tax-free and without penalty for qualified medical expenses right away. After you turn 65, you can also use the money for any expenses without tax or penalty. Lastly, unlike other retirement accounts, HSAs do not have Required Minimum Distributions (RMDs) once you reach the age of 72. This makes the HSA one of the most powerful retirement savings tools available.

How much money should I be saving in my HSA?

The IRS limits the amount of money that can be contributed to a Health Savings Account (HSA) each year. For 2025, individuals can contribute up to $4,300, while families can contribute up to $8,550. Although it may not be feasible for everyone to maximize their HSA contributions, a good strategy is to contribute the difference between the premium healthcare plan and the high-deductible health plan (HDHP).

For instance, if the premium plan costs $500 per month and the HDHP costs $250 per month, it would be wise to set aside the difference of $250 per month in your HSA. Remember that any contributions made by your employer on your behalf also count towards your annual contribution limit.

Is investing your HSA money and treating it like a retirement savings account practical?

While the Health Savings Account (HSA) is often considered one of the most effective retirement savings tools, it's important to question whether investing money you might need for short-term medical expenses is wise. The answer is no. Similar to an emergency fund, the purpose of a health savings account is to help you avoid medical debt during significant medical events. This means you should maintain a solid cash cushion to cover near-term expenses—ideally, enough to cover up to two years of your maximum out-of-pocket limit—before considering investing for the long term.

How should HSA savings be invested?

If you have enough cash to cover your immediate medical expenses, consider investing the remaining balance of your Health Savings Account (HSA) for the long term. Most HSA providers offer investment options similar to those available in other retirement accounts, such as market indexes, exchange-traded funds (ETFs), and mutual funds. Your investment portfolio should align with your other portfolios and match your risk tolerance and long-term financial goals. Always consult a financial professional before making any investment decisions.

Biblical Application

God’s Word teaches us that planning and saving for the future is wise and beneficial.

“The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” — Proverbs 21:5

“Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.” — Proverbs 21:20

A diligent steward of God’s resources will strive to save for immediate medical expenses and future seasons of life that may require additional financial support. Given the multiple tax advantages of a Health Savings Account (HSA), it serves as an excellent tool for managing your resources effectively.

About the author: Nate Sargent loves serving at his church with his wife and two children. In his free time, Nate enjoys running, hiking, and woodworking. Learn more about Nate and his financial counseling services through his website, natesargent.com.