Why Some Advisors Treat HSAs Like Retirement Accounts

Some financial advisors are encouraging clients who qualify for high-deductible health plans to treat health savings accounts as an additional retirement vehicle. The approach calls for contributing the maximum allowed, investing the balance, and paying current medical bills out of pocket so the HSA can compound over decades.

Under 2026 rules, the contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. Employers commonly permit payroll deductions to fund HSAs, which lowers both income and payroll taxes. Many HSA custodians permit investment of the balance once a minimum cash threshold-often $1,000 or $2,000-is met. Account holders should review custodian fees and investment options before implementing the strategy.

Advisors point to three tax features that distinguish HSAs from other accounts. Contributions reduce taxable income, investment gains grow tax free, and withdrawals for qualified medical expenses are tax free. After age 65, withdrawals for nonmedical purposes are taxed as ordinary income, like distributions from a traditional IRA, but are not subject to the 10% early-withdrawal penalty. HSA balances are not subject to required minimum distributions.

Eligibility requires enrollment in a qualified high-deductible health plan. Contributions must stop once an individual enrolls in Medicare. HSA funds can be used in retirement to pay Medicare premiums and other qualified health costs, which advisors cite as a direct way to cover health-related expenses that often rise faster than general inflation.

Some advisors recommend the strategy primarily for clients who can carry the trade-off of lower premiums and higher out-of-pocket costs. Wealthier households are more likely to be able to absorb near-term medical bills and may face limits on how much they can shelter in traditional IRAs or Roth IRAs, so an HSA provides an extra tax-advantaged container.

Practitioners offer different implementation suggestions. One adviser recommends using IRA distributions after age 59½ to fund HSA contributions in years when the client is eligible, because the 10% early-withdrawal penalty on IRAs no longer applies and future medical HSA withdrawals would be tax free. Another adviser emphasizes that allowing the HSA to grow while paying current medical expenses out of pocket can build a sizable balance for later health costs.

Advisors also warn about operational constraints and risks. The strategy requires disciplined saving, the ability to cover near-term medical costs outside the HSA, and strict adherence to contribution caps and plan rules. HSAs were created by federal law in 2004, so relatively few people have had decades to accumulate HSA balances. In a downside scenario, withdrawals for nonmedical expenses would simply be taxed like traditional retirement accounts.