How an HSA Works: the Triple Tax Break and Investing for Retirement

A Health Savings Account (HSA) is a savings account for medical costs, linked to a high-deductible health plan. It is also the only US account with three tax breaks: the money goes in untaxed, it grows untaxed, and it comes out untaxed when you spend it on medical care. Many people use it only to pay this year's doctor bills. But you can invest the money, and after 65 an HSA works much like an extra IRA. This guide explains who can open one, the 2026 limits, how to invest it and the rules for getting money out. All figures are for 2026.

Who can open an HSA

You can pay into an HSA only for the months when all of these are true:

• a high-deductible health plan (HDHP) covers you;
• no other health cover that is not an HDHP covers you (a spouse's general health plan or a general-purpose health FSA can disqualify you);
• you are not enrolled in Medicare;
• nobody can claim you as a dependent.

For 2026, an HDHP must have a deductible of at least $1,700 for self-only cover or $3,400 for family cover, and out-of-pocket costs of at most $8,500 or $17,000. From 2026, bronze and catastrophic plans bought on the marketplace also count. Your plan documents say if your plan is HSA-eligible. The figures come from IRS Revenue Procedure 2025-19.

The account is yours, not your employer's. It stays with you when you change jobs or health plans, and the money never expires. If you lose your HDHP later, you cannot pay in any more, but you keep the account and you can still spend it.

The triple tax break

1. On the way in. Your payments are deductible, even if you do not itemize. If your employer pays in through payroll, the money also escapes Social Security and Medicare tax (7.65%). No other account offers that.
2. While it grows. Inside the account, nothing is taxed: no tax on interest, dividends or gains.
3. On the way out. A withdrawal spent on qualified medical costs is tax-free, at any age.

A 401(k) or a traditional IRA gives you the first two. A Roth IRA gives you the last two. Only the HSA gives you all three, which is why many people fill it before they put more into a 401(k) beyond the match.

The 2026 limits

The limit counts your money and your employer's money together. Your type of cover decides which limit applies, and if you change cover during the year, the limit is worked out month by month. The last-month rule lets you pay in the full year's amount if you are eligible on December 1, but you must then stay eligible for the whole next year, or part of it is taxed. The rules are in IRS Publication 969.

How to invest your HSA

Most HSA providers (Fidelity, HealthEquity, Lively and others) keep your money in cash at first. Many ask you to keep a minimum cash balance, such as $1,000, before you can invest the rest in funds. In the cash account, the money earns little.

If you can pay your medical bills from your normal budget, consider this approach:

1. Pay your medical bills out of pocket.
2. Keep the receipts.
3. Invest the HSA money for the long term, like your 401(k) or IRA.
4. Pay yourself back from the HSA years later, tax-free.

The law sets no time limit on that payback, as long as the cost came after you opened the HSA. Each receipt becomes a tax-free withdrawal you can take whenever you want. Keep the receipts safe: the IRS can ask for them.

Foreign withholding inside an HSA

One cost the account cannot remove: tax that a foreign country withholds on its dividends. An HSA cannot claim the foreign tax credit, so that withholding is lost for good. Unlike an IRA, an HSA does not get the Canadian treaty exemption either, because it is a health account, not a retirement account. Read more in what is dividend withholding tax.

Getting money out

Qualified medical costs include doctor and hospital bills, prescriptions, dental care, glasses and contact lenses, and many other items. From 65 you can also use the HSA tax-free for Medicare premiums (but not Medigap premiums). The 20% additional tax also does not apply if you are disabled.

So after 65, an HSA works like a traditional IRA with a bonus: money for anything else is taxed as ordinary income, and money for medical costs is not taxed at all. Most people have medical costs in retirement, so very little of a well-used HSA ever pays tax.

No required minimum distributions

You never have to take money out of your own HSA. There is no RMD at any age, so the account can grow for your whole life.

What happens at death

If your spouse is your beneficiary, the HSA becomes their own HSA, with all the same benefits. If anyone else inherits it, the whole balance is ordinary income for them in the year of your death. This is the harshest rule of any US account. If you plan to leave money to your children, spend the HSA first and leave them other accounts.

HSA, 401(k) or IRA: what to fill first

A common order of priority:

1. Your 401(k) up to the full employer match. Read how a 401(k) works.
2. Your HSA, up to the limit, if you have an HDHP.
3. A Roth IRA or a traditional IRA.
4. Back to the 401(k).

The HSA comes early because no other account gives you three tax breaks. But an HDHP is not the right health plan for everyone: if you expect high medical costs, compare the total cost of each plan first.

Track your HSA with the rest of your portfolio in Cadances

An HSA is usually one account among several: a 401(k) at work, an IRA, a taxable brokerage account. Many people forget the HSA when they look at their portfolio, but invested for decades, it can become one of your largest accounts. Cadances is a portfolio tracker: it puts all of them in one place and gives you one total, one allocation and one performance figure.

• An account type priced the way the law prices it. On the Portfolios screen, the HSA is its own account type, next to the 401(k), the IRAs and your taxable accounts. Dividends and gains inside it show as untaxed, so your income forecast is not cut by a tax you do not pay.
• The rules, made visible. For US residents, the Tax screen shows the 2026 limit and reminds you that your type of cover decides which limit applies. It prices what a withdrawal for anything other than medical costs would cost today, with the 20% until 65, and it tells you there is no minimum distribution.
• All your providers in one place. Import the export file from your HSA provider, or add your funds by hand. Your HSA at one provider and your 401(k) at another sit in the same view.
• Performance and allocation. On Performance, compare your HSA with the S&P 500 over the window you pick. Set allocation rules on each portfolio and see when your mix drifts away from your target.

Two limits to keep in mind: Cadances does not know your health cover, so it shows the self-only limit, the smaller one. If you have family cover, your limit is $8,750. It also does not model the $1,000 catch-up from 55. And Cadances does not track your medical receipts, so keep them yourself.

Start free. Create your Cadances account: no card, no time limit. The Free plan holds one portfolio of up to 15 holdings, which is enough for one HSA. To track your HSA, your 401(k) and your IRAs side by side, compare the paid plans.

The bottom line

• An HSA is tax-free on the way in, while it grows and on the way out for medical costs.
• You need a high-deductible health plan to pay in.
• In 2026 you can pay in $4,400 with self-only cover or $8,750 with family cover, plus $1,000 from 55.
• Invest the money, pay medical bills out of pocket if you can, and keep your receipts.
• After 65, money for anything else is ordinary income, with no 20%.
• No minimum distributions, but a harsh rule for heirs who are not your spouse.

Each monthly payment is dollar-cost averaging by design, and a diversified mix inside the account matters as much as the amount you put in.

This article is general information, not tax, legal or medical advice. Your own situation decides which rules apply to you.