Health Savings Accounts (HSA's): Three is a Magic Number

By: Philip "Flip" O'Toole

“Every triangle has three corners. Every triangle has three sides. No more, no less, you don’t have to guess. When it’s three, you can see, it’s a magic number.”

- Bob Dorough, Schoolhouse Rock (1973)

1. Three, it’s a Magic Number

If you are Gen X like me, you may remember Schoolhouse Rock on Saturday mornings in the ‘70’s and early 80’s. They were short three-minute educational videos about grammar, math, science, civics, history and economics in between episodes of Scooby-Doo and Super Friends. One of my favorites was a math lesson titled “Three is a Magic Number”, which later became one of the great cover songs of all time thanks to Blind Melon in 1996.

Little did I know during my childhood that this catchy song would pop into my head decades later when thinking about how provisions in Trump’s “Big Beautiful Bill” will enhance the already tremendous benefits of Health Savings Accounts (HSA’s) compared to all other tax-advantaged saving and investment vehicles. Here is the first reason why… Under the IRS tax code, all Americans have access to four types of saving and investment accounts, all receiving slightly different tax treatment. Let’s take a look:

1. A Traditional brokerage account receives no favorable tax treatment, in terms of no deductions on contributions and no tax-deferred growth.
2. A Traditional Retirement Account (401k/403b/IRA) offers two tax benefits: up-front tax deductions and tax-deferred growth. All future withdrawals are, however, fully taxable as ordinary income.
3. A Roth Retirement Account also offer two tax benefits, albeit slightly different than their traditional counterpart. A Roth account does not allow for up front deductions, but they do enjoy tax-deferred growth and tax-free withdrawals.
4. A Health Savings Account, by contrast, is the only savings and investment vehicle that offers ALL THREE tax benefits including up-front deductions on contributions, tax-deferred growth AND tax-free withdrawals.

With that said, it must reason that Americans do not view their HSA’s as glorified checking accounts to only be used to reimburse themselves for copays and deductibles incurred year to year. Instead, they certainly must view them as the most tax-efficient long-term saving and investing vehicle that can be utilized at any point over the course of their long term financial plan. But are they? Let’s take a closer look...

  2. Health Savings Accounts (HSA’s) are Woefully Underutilized by Too Many.

According to a study published in 2025 by the Employee Benefit Research Institute (EBRI), the average HSA account balance in 2023 was just $4,747. The average contribution in 2023 was $2,075, while the average distribution was $1,801, only slightly below the average contribution. Perhaps most shocking is that only 15% of accountholders invested their contributions in something other than cash.

Despite the added benefits HSA’s have over Traditional and Roth Retirement accounts, it is clear by the data that many still view them just like they view Flexible Spending Accounts (FSA’s). As mentioned above, the perception of HSA’s seems to be that they are merely a minor convenience only to be used to reimburse for out-of-pocket health care expenses like copays and deductibles in the current year.

We believe with a little education; Americans can begin to utilize their HSA’s to their full potential. Below are three keys to unlocking that potential:

❖Understand the Potential Health Care Tsunami that Awaits in Retirement

❖Understand How to Leverage your HSA over Other Retirement and Savings Accounts

❖Think Different

Let’s dive into each of these keys a bit deeper…

  3. A Potential Health Care Expense Tsunami Awaits in Retirement

There have been many studies conducted over the years projecting how much Americans will spend on health care in retirement. These projections vary greatly. A review of several recent studies, revealed a range of estimates between $330k and $680k for a 65-year old married couple. Below are just a few excerpts from these studies:

❖“Some couples could need as much as $413,000 in savings to meet their health care requirement spending in retirement.” (EBRI)

❖“The projected lifetime cost of care for an average 65-year old couple is $683,306, and that doesn’t factor in long-term care costs, which could be upwards of $100,000 a year.” (RBC)

❖“Medicare premiums with prescription drug coverage account for between 73% and 81% of annual health care costs for the majority of retirees, regardless of the type of Medicare coverage.” (T. Rowe Price)

❖“A healthy 65-year old couple who retired in 2023 will likely use nearly 70% of their lifetime Social Security benefits to cover their medical costs in retirement.” (Ben Storey, Bank of America)

❖“People age 55 and over account for 55% of all health care spending in the US, despite only representing 31% of the population.” (Peterson-KFF Health System Tracker – chart below)

Actual out-of-pocket health care expenses will vary wildly from retiree to retiree. Trying to project one’s total healthcare costs in retirement is difficult, but there are a couple of important takeaways. First, plan on the actual cost being a significant percentage of overall spending throughout retirement. Second, and not surprisingly, plan on your health care expenses increasing as a percentage of your overall budget as you age.

What about Long-term Care (LTC)? The above projections do not include the cost of long-term care. It is important to understand the likelihood there will be a need for LTC and the current costs. It is also important to know that HSA’s can be used to pay for medically necessary long-term care services and even pay for LTC insurance premiums. According to Charles Schwab:

• Likelihood | Close to 70% of today’s 65-year olds will require long-term care, ranging from in-home health aides to full-fledged nursing homes.
• Cost | The median annual outlay in 2023 was $75,504 for an in-home health aide and $116,800 for a private room in a skilled nursing facility.

If you happen to be part of the 70% that will require long-term care, costs can escalate quickly. When you add out-of-pocket expenses not covered by Medicare, overall health care expenses in retirement can escalate quickly, especially during the last years of life. With that as a backdrop, how can Americans maximize the potential of their HSA’s to help solve the health care cost tsunami in retirement?

  4. Understand How to Best Utilize HSA’s by Knowing the Do’s and Don’ts

There is a lot of confusion about what can and cannot be done with Health Savings Accounts. If more Americans understood their potential, we believe more would not only prioritize funding their HSA, even over other types of retirement accounts (in particular a Traditional 401k or IRA), but also invest their contributions for the long-term as opposed to spending down their account each year. Let’s see if we can clear up some of the confusion with some facts about HSA’s:

• Eligibility | Employees enrolled in a high-deductible health plan (HDHP) are generally eligible to participate in a HSA. According to a May 29, 2025 article in the Wall Street Journal, over 60 million Americans currently have access to HSA’s and there are provisions in the recently passed “Big Beautiful Bill” expanding access to 20 million more.
• Ownership | Unlike Flexible Spending Accounts, HSA’s are owned by the employee, not the employer. All accounts are owned by an individual, but funds can be used to pay for qualified medical expenses of the owner, spouse and dependents.
• Funded with Pre-Tax Dollars | 100% of contributions are fully tax-deductible.
• Contribution Limits | In 2025, the contribution limits are $4,300 for those enrolled in an individual HDHP, $8,550 for those in a family HDHP and those age 55 or older are allowed an additional $1,000 catch-up contribution.
• Company Matches | While most companies do not offer matching contributions, many offer a “seed” or initial contribution to encourage participation.
• No Expiration Date on Contributions | 100% of unused contributions are carried forward year after year.
• Tax-deferred Investing | Contributions can be invested for potential tax-deferred growth much like 401k/403b plans.
• Max Portability | Like 401k/403b plans, HSA’s can be transferred or rolled over to another financial institution to help manage. Unlike 401k/403b plans, you do not have to wait until separation of employment to transfer or roll over HSA’s, making them even more portable than your 401k/403b.
• Tax-free Withdrawals for Reimbursements of Qualified Expenses | Withdrawals are tax-free when used to pay for qualified health care expenses which, according to IRS Tax Code Section 213(d), includes, but are not limited to copays, deductibles, coinsurance, doctor visits, hospital stays, prescription drugs, and certain dental and vision care. The “Big Beautiful Bill” will expand this list starting in 2026. Additionally, there is no penalty for making “early” withdrawals prior to age 59 ½ like there is with a Qualified Retirement Account.
• No Statute of Limitations on Reimbursements | A rainy day fund feature of the HSA is as long as the expenses occurred while you were enrolled in a HSA, there is no limit on how far back you can go to reimburse yourself for a qualified expense.
• Tax-free Withdrawals to pay Medicare Premiums | HSA funds can be withdrawn tax-free and used to pay for Medicare premiums because they are considered a qualified expense by the IRS.
• Assets in HSA’s can be used for Non-qualified Expenses Penalty-free after Age 65 | While withdrawals for non-qualified expenses after age 65 are taxed as ordinary income (just like a Traditional 401k or IRA withdrawal), there is no additional penalty.
• NO Required Minimum Distributions (RMD’s) | As long as assets in a HSA’s can continue as long as you do without the IRS requiring you to start drawing down the account like they require with Traditional Retirement Accounts.
• Inherited Accounts | The good news is that inherited accounts are not subject to probate and pass directly to a spousal beneficiary without any immediate tax consequences. The bad news is non-spouse beneficiaries owe income tax on the full amount in the year of inheritance.

HSA’s provide many benefits over other types of saving and investment vehicles. Of the 14 features and benefits highlighted above, only three are arguably less compelling than traditional retirement accounts: contribution limits, matches and inherited accounts. The other eleven are either a wash (like up front tax deductions and tax-deferred growth) or a significant advantage of the HSA (max portability, tax-free withdrawals and no RMD’s). So, what can Americans do today to change their HSA from a minor convenience to a major financial planning solution?

  5. Think Different about HSA’s

So here is the question:

If an employer suddenly offered a different type of retirement savings account that provided the following...

1. more tax-efficiency than either a Traditional or Roth 401k/403b
2. similar ownership structure and investment options as a 401k/403b
3. more portability than a 401k/403b
4. funds can be accessed penalty free and tax free prior to age 59 ½ for qualified expenses
5. no forced Required Minimum Distributions (RMD’s) by the IRS like your traditional retirement accounts
6. is ultimately the most tax-efficient way to help tackle one of your biggest expenses in retirement, health care
7. AND any funds you would like to use for non-qualified health care expense after age 65 are treated by the IRS just like funds withdrawn from a Traditional Retirement Account (401k, 403b or IRA)…

…would you be opposed to increasing your annual contribution and investing it for long-term growth if you had access to that type of account?

Because these accounts can be used to help solve one of the biggest challenges in retirement, unknown health care expenses, our advice would be to not look at HSA’s as a minor convenience to pay for copays and deductibles in the current calendar year, but instead to see them for what they are, a powerful long-term planning and investment tool.

  6. Summary and Highlights

Health Savings Accounts’s (HSA’s) are woefully underutilized by too many. | According to the Employee Benefit Research Institute (EBRI), the average HSA account balance in 2023 was just $4,607, the average contribution in 2023 was only $1,962, the average distribution was $1,801, and only 13% of accountholders invested their contributions in something other than cash.

A potential health care expense tsunami awaits in retirement. | Many studies estimate that retirees will need somewhere between $330k and 680k for out-of-pocket health care expenses after age 65, not including long-term care which currently runs around $75k/year for an in-home health aide and around $117k/year for a private room in a skilled nursing facility.

Understand how to best utilize HSA’s by knowing the do’s and don’ts. | In addition to the triple tax-efficiency exclusive to the HSA, funds can be invested for growth, accounts are more portable, there are no time limits on contributions or reimbursements, there is a long list of eligible qualified health care expenses including Medicare premiums that can be paid with tax-free reimbursements, there are no RMD’s and funds used for non-qualified expenses after age 65 are taxed just like funds in traditional retirement accounts by the IRS.

Think different about HSA’s. | Now that we better understand the health care expense challenge that awaits in retirement, the benefits of HSA’s, and the advantages they have over other types of saving and investment accounts, is it time to start thinking about the HSA as a powerful long-term planning and investment tool as opposed to an often underutilized, minor convenience?

  7. Three, it’s a Magic Number

Every situation is different, and I wouldn’t advise making any changes before sitting down with a planner. There are many questions that still need to be asked and answered. Here are a few:

❖Are you still working and do you have access to a HSA?

❖If retired, how much do you have saved in a HSA?

❖What is the breakdown of your current retirement savings by account type and asset allocation?

❖To which type of accounts are you allocating your annual savings?

❖Do you anticipate your ongoing health care expenses in retirement will be below or above average based on your current health and family history?

Our hope is that more Americans choose to leverage and maximize the benefits of HSA’s strategically within the context of a comprehensive plan to help them solve for their lifetime medical costs. For many people, the best way to do that is to max out their HSA contributions annually and invest the proceeds for long-term growth to be used in retirement, just like they do with their 401k/403b savings. And when in need of a simple reminder as to why to max out your HSA, remember it is truly the only account where “three is a magic number”.

Please feel free to email me at flipo@tojwealth.com with comments and/or questions.