8 Facts About HSAs That Many People Overlook

January 31, 2026

Understanding Health Savings Accounts

Health Savings Accounts (HSAs) are, in my opinion, one of the best types of investment accounts out there, mainly due to their fantastic “triple tax-free” benefits. You can deduct contributions, watch the money grow without worrying about taxes, and when you withdraw it for medical costs, it’s tax-free. Each year, our HSA is the first account we prioritize, and given that we’ve been investing actively since 2010—and only recently started spending—the value of our HSA has surpassed $250,000.

This situation, much like having an overfunded 529 plan, is quite a welcome dilemma. In the worst case, if you have to make withdrawals, they won’t incur penalties after age 65—albeit it won’t be tax-free—turning it into something akin to a 401(k), earning HSAs the nickname “stealth IRA.”

Still, I find many folks aren’t well-informed about HSAs. So, I thought it might be helpful to clear up some common misconceptions surrounding them.

#1 Clarifying HDHP and HSA

A lot of people mix up HSAs with High Deductible Health Plans (HDHP). They actually serve different purposes. An HSA is an investment account, whereas an HDHP is a type of insurance. It’s important to keep those distinctions clear. If your only health insurance option is an HDHP, you’re allowed to fund an HSA. Whether or not an HDHP is the right choice for you or your family isn’t a simple question. I used to suggest that frequent users of healthcare might not benefit from HDHPs, but frankly, I’ve seen too many exceptions to that rule for it to be reliable advice. It’s better to run your own calculations.

I’ve seen cases where HDHPs turned out to be pricier than traditional plans, and on the flip side, I’ve also encountered HDHPs with superior coverage. When you throw in the tax perks of a fully funded HSA, it could be worth considering, even for those who hit their out-of-pocket maximum each year. So, check what’s available through your employer or in your local market.

Should you participate in an HSA? Well, it’s complicated.

Do I need an HDHP to use my HSA?

#2 Investment Options for HSAs

Absolutely. There’s no reason to let your HSA funds just sit in a low-interest account. Similar to how a 401(k) operates, you have the option to invest HSA funds in mutual funds. You might keep some cash on hand (which might even be required by your HSA plan), but anything above a certain limit can be channeled into investments. It’s essential to note that HSAs are different from Flexible Spending Accounts (FSAs). With an FSA, it’s a “use it or lose it” situation, but any balance left in your HSA at the end of the year stays there for future use.

#3 Transferability of HSAs

Many individuals contribute to their HSAs via payroll deductions, which can help save on payroll taxes and may even include an employer match. However, funding your HSA this way isn’t mandatory. You can also make a direct transfer from your bank to the HSA you choose at the beginning of each year. Moreover, you aren’t restricted to using just your employer’s HSA. You have the freedom to roll it over to an account with preferable fees and investment opportunities. Just a note: while a “rollover” (moving funds from one custodian to another) is limited to once a year, a direct transfer between HSAs can be done anytime. You could do it with each paycheck, although that might become a bit of a hassle.

#4 Using HSAs Without HDHP

While you must have an HDHP to participate in an HSA, you don’t need one to use your HSA funds. You can switch to a different medical plan down the line. Even if you lack health insurance, you can still use HSA funds under certain circumstances:

Yourself
Your spouse
Dependents you can claim on your taxes (including adult children and parents)
Anyone who could have been claimed if not for filing jointly.

Health insurance premiums generally aren’t considered HSA expenses, though a few exceptions exist:

COBRA premiums
Insurance premiums during unemployment
Medicare premiums
Employer-sponsored health coverage for retirees over 65
Nursing care insurance premiums

While many of these may not apply to everyone, Medicare contributions could be a helpful way to maximize your HSA.

#5 Contributions from Non-dependents

One intriguing aspect of HSA law is how it allows single individuals to contribute to their family member’s HSA. If your adult children are not your dependents and are enrolled in a family HDHP, they can make family contributions to their own HSAs as well as yours. Isn’t that interesting? Furthermore, if you’re not married but share a life with someone in a family HDHP, both of you can contribute to your HSAs. The rules are based on health insurance coverage rather than family structure.

This situation is a peculiar quirk of the “marriage tax penalty.” It’s possible that this loophole might be closed one day, but for now, it’s how it stands.

#6 Timing Withdrawals

You don’t need to withdraw from your HSA in the same year you incur expenses. My family and I often use a “save your receipts” approach, where we pay for medical costs now and keep the receipts handy for tax-free withdrawals later. For example, if you spend $8,000 on medical costs in 2024, you could wait until 2034 to withdraw that same amount tax-free from your HSA. If you ever face an IRS audit, those receipts are your proof. Just remember that most receipts don’t age well, so make sure you digitize them. Should you adopt this strategy? I’ve been tending to ease out of it, but it’s definitely a valid approach for managing an HSA.

#7 Maximizing HSA for Healthcare

Though many see their HSAs as a “stealth IRA,” it still makes sense to utilize HSA funds for medical expenses at some point. The higher your tax liabilities, the more beneficial it is to use HSA dollars for healthcare, even if you plan to spend your receipts on other things. In fact, one could argue that using an HSA this way minimizes hassle. Most people will likely continue to make additional investments year over year.

#8 HSAs and Charitable Giving

While it’s nice for your heirs to inherit an HSA, they’d probably prefer to have something else that holds equal value. HSAs aren’t the best accounts to pass down. Upon your death, the HSA ceases to exist for you, and your heirs can’t access it tax-free for medical costs. Unlike taxable accounts, the basis doesn’t increase upon your passing. HSAs also don’t extend over 10 years like IRAs do, nor can they be rolled into a 401(k) or other employer-sponsored plans. Essentially, that becomes income taxed at the highest rates for your heirs in the year of your death. Quite surprising, right?

However, if charitable giving is your intention, an HSA is a great asset to leave for that purpose. Neither you nor your heirs will incur income taxes on it, and your chosen charity will benefit without tax deductions. Even if our HSA is likely overfunded, we plan to allocate a sizeable portion to charity after we pass.

HSAs are undeniably valuable but niche investment accounts. Familiarize yourself with the rules to truly reap the benefits.

What are your thoughts? Do you make use of an HSA? How do you approach it?