The Retirement Account Hidden in Your Health Insurance
The triple tax advantage only works if you don't spend it.
A few years ago I was staring at my benefits enrollment page trying to cut costs. Health insurance premiums had gone up again. I switched to the high-deductible health plan (HDHP) - lower monthly premium, higher out-of-pocket maximum. Simple math.
What I didn’t realize was that switching to an HDHP made me eligible for something else entirely. A health savings account. I opened one mostly out of curiosity, contributed a little, and promptly used it to pay medical bills throughout the year. End of story, I thought. Just another benefits account.
Then I actually read the rules.
What I had been treating as a medical checking account was something else entirely. No other account in the American tax code does all three of these at once: contributions go in pre-tax, reducing your taxable income today; the money grows tax-free inside the account; and withdrawals for qualified medical expenses come out completely tax-free - no income tax, no capital gains tax, nothing. A 401K gives you pre-tax contributions and tax-deferred growth, but you pay ordinary income tax on the way out. A Roth IRA gives you tax-free growth and tax-free withdrawals, but contributions are post-tax. The HSA does all three - for any qualified medical expense, at any age. Fidelity calls it “unmatched tax benefits.” They are not wrong.
But here is the part I had completely missed - and the part that changes everything.
You don’t have to spend it this year. Or next year. Or the year after.
I had mentally filed the HSA alongside my FSA - the flexible spending account that expires at year end if you don’t spend it down. That’s the FSA. The HSA is the opposite: the balance rolls over every year indefinitely. More importantly, you can invest the balance in the stock market, let it compound for decades, and reimburse yourself for medical expenses you paid out of pocket years or even decades earlier. There is no time limit on reimbursement. Pay a medical bill today, keep the receipt, and reimburse yourself from a much larger compounded balance fifteen years from now. Tax-free.
After age 65 the account functions like a traditional IRA for non-medical expenses - you can withdraw for anything, paying ordinary income tax but no penalty.
I had been spending mine on copays.
Fidelity’s own research finds only 23% of Americans say they are contributing to an HSA as one way to prepare for health care costs in retirement, and just 3 in 10 are investing their HSA assets at all. Among people ages 55 to 64 - the group closest to retirement, for whom this account matters most - more than half have no idea an HSA can be used as a retirement savings vehicle.
The behavior gap is even wider than the knowledge gap. According to Devenir’s 2024 year-end survey of 39 million HSA accounts, only about 9% had invested any portion of their funds. Nine percent. The other 91% are treating one of the most powerful accounts in the tax code as a medical debit card. The accounts that do invest tell the story: the average balance for an investing HSA holder is $22,032 - nearly nine times larger than the average balance of someone who holds HSA funds but never invested them.
The healthcare cost problem this account is designed to solve is larger than most people realize. Fidelity’s 2025 research found that one in five Americans has never considered healthcare costs in retirement at all - a figure that rises to one in four among Gen X. The account exists precisely to solve this problem. Most people aren’t using it.
The family HSA contribution limit is $8,550 for 2025. Invest that amount annually in an S&P 500 index fund - which has returned an average of 10.35% annually with dividends over the 20 years ending December 2024, per Fidelity - and after 20 years you have approximately $560,000. Contribute the same amount but spend it down every year and you have zero. Fidelity’s 2025 Retiree Health Care Cost Estimate puts average healthcare spending for a 65-year-old at $172,500 - not including long-term care costs. At $560,000 versus $172,500, a fully invested HSA covers the average retirement healthcare cost more than three times - every dollar tax-free.
What changed my approach was realizing that the strategy is simple even if most people don’t use it. Pay current medical expenses out of pocket from regular savings. Save every receipt. Let the HSA compound. Reimburse yourself later from a much larger balance.
The receipt system sounds tedious until you automate it. I forward every medical receipt - insurance explanation of benefits statements, pharmacy receipts, provider bills - to a dedicated email address. If you use Gmail, you can connect it to Gemini and have it summarize all your medical receipts without opening each one. The records are there when you need them, searchable, permanent. The IRS has no time limit on reimbursement as long as the expense occurred after you opened the account. One email folder and fifteen seconds per receipt is the entire administrative burden.
The catch is real and worth stating clearly. This strategy requires you to have enough cash outside the HSA to cover your out-of-pocket medical expenses in the years you’re building the balance. For a family on an HDHP, the IRS caps the maximum out-of-pocket at $16,600 for 2025. If you don’t have that cushion in accessible savings, spending down the HSA as you go is the right call. The triple tax advantage is worth nothing if it forces you into debt to cover a medical bill.
But if you have that cushion - and if you’re reading this newsletter, you probably do - for eligible account holders, spending down the HSA every year is one of the most expensive financial habits hiding in plain sight. You’re converting a compounding tax-free investment account into a pass-through account with a tax deduction at the front end and nothing else.
Two things to do this week.
First - check whether you are on an HDHP and therefore eligible for an HSA. If you’re on a traditional low-deductible plan you cannot contribute. If you are eligible and don’t have an account open, open one. The family contribution limit is $8,550 for 2025 and you have until the tax filing deadline to contribute for the prior year.
Second - if you already have an HSA, log in and check whether your balance is sitting in cash. Most HSA providers require you to manually select investments - it doesn’t happen automatically. Note that some providers require a minimum balance before enabling investments - if yours does, check the threshold and plan accordingly. Move the balance you don’t need for near-term medical expenses into a low-cost index fund. That single action, done once, is worth compounding for decades.
The account was always there. The rules were always public. Nobody explained them.
That’s the fine print.
Have you been spending down your HSA every year - or have you figured out the investment strategy? Hit reply. I read everything.
I am not a financial advisor. Nothing in this newsletter is investment or tax advice. Fine Print Investing publishes weekly.