With open enrollment underway and healthcare costs continuing to rise, Health Savings Accounts (HSAs) are emerging as a powerful, tax-advantaged tool for both current medical expenses and long-term financial growth.
Offering triple tax benefits—pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified expenses—HSAs can serve as a significant retirement savings vehicle. Financial advisors recommend maintaining a cash reserve for immediate needs while aggressively investing the remainder in a diversified equity portfolio for compounding returns.
As open enrollment season gets into full swing, employees across the nation are reviewing their healthcare benefits for the upcoming year. With healthcare costs continuing their upward trajectory, a spotlight is shining brightly on a powerful, often underutilized, financial tool: the Health Savings Account (HSA). This workplace investment account offers remarkable tax advantages and a unique opportunity for long-term growth.
Healthcare expenses remain a significant concern for both workers and employers. According to data from KFF (formerly the Kaiser Family Foundation), the average total family premium, including the employer's contribution, has soared to $28,303 – a 5% increase from the previous year. To help manage these escalating costs, more companies are adopting high-deductible health plans (HDHPs), which pair perfectly with HSAs. In fact, nearly 40% of businesses with at least 10 employees offering health benefits now include an HSA-qualified plan.
HSAs are lauded by financial experts for their 'triple-tax advantage.' First, contributions deducted directly from your paycheck are pre-tax, reducing your taxable income. Second, the money you stash away in an HSA grows tax-free. Finally, withdrawals made for qualified medical expenses are also completely tax-free – just remember to diligently save your receipts!
“I love HSAs because of their triple-tax advantage,” shares Eileen Olson, CFP and founder of Emerald Wealth in Daufuskie Island, South Carolina. “For people who can afford to leave it alone, it can be one of the best retirement accounts they’re going to have.”
A Powerful Vehicle for Long-Term Wealth
For 2027, individuals with self-only HDHP coverage can contribute up to $4,500 to an HSA, a figure that includes any employer contributions. For family plans, this limit rises to $9,000. Additionally, those aged 55 and older who are not enrolled in Medicare can make an extra $1,000 'catch-up' contribution.
It's crucial to distinguish HSAs from Flexible Spending Accounts (FSAs). Unlike FSAs, which typically require funds to be used by the end of the plan year (with some minor carryover exceptions), HSA funds never expire. This evergreen nature makes HSAs an unparalleled tool for long-term financial planning. Moreover, your HSA is portable, meaning it stays with you even if you change employers.
“Get the money deployed, take advantage of the pretax contribution, and allocate the money into a growth portfolio,” advises Mark Stancato, certified financial planner at VIP Wealth Advisors in Decatur, Georgia. “With the HSA, you can keep compounding year over year.”
Optimizing Your HSA for Maximum Growth
The investment options within an HSA can vary by provider, and some plans may require a portion of your funds to remain in cash. Typical HSA fund menus offer between 15 and 25 options, with accountholders often choosing two to four funds, according to Greg Carlson, senior research analyst for equity strategies at Morningstar.
Determining your HSA allocation strategy depends on several factors: your family’s projected health needs for the coming year, your comfortable cash flow for contributions, and your personal risk tolerance, explains André Small, CFP and founder of A Small Investment in Houston.
Health Savings Accounts: Key Info for 2027
| Category | Self-only coverage | Family coverage |
|---|---|---|
| Annual contribution limit | $4,500 | $9,000 |
| Catch-up contribution (age 55+) | $1,000 | $1,000 |
| Annual high-deductible plan deductible limit | No less than $1,750 | No less than $3,500 |
| Annual out-of-pocket expenses | No more than $8,700 | No more than $17,400 |
Source: Internal Revenue Service
Small typically recommends keeping a cash reserve equal to 120% of the plan's out-of-pocket maximum. “That covers a bad year without forcing a sale at the wrong time,” he explains. “Above that amount? I typically advise investing the amount the client is comfortable investing, allocated to their risk tolerance, their time horizon and the goal of spending these dollars on care later.”
For 2027, the IRS defines a high-deductible plan as one with an annual deductible of no less than $1,750 for self-only coverage (or $3,500 for family plans), and an out-of-pocket expense limit not exceeding $8,700 for self-only (or $17,400 for family coverage). Note that out-of-pocket expenses include deductibles, copays, and other costs, but exclude premiums.
Embracing a Growth-Oriented Approach
Beyond the necessary cash reserve, financial advisors consistently suggest allocating the remainder of your HSA funds into equities. Patrick Swift, CFP and president of Amplius Wealth Advisors in Blue Bell, Pennsylvania, targets an allocation of up to 60% in U.S. large-cap stocks, 20% in small and mid-cap stocks, and 20% in international stocks.
“We believe the equity portfolio should be well diversified,” Swift states. “If the [HSA] balance is 2% to 10% of your net worth, why not be aggressive? That can change based on the situation, but if you are comfortable with the philosophical aspect, why not be growth oriented?”
Similarly, Mark Stancato favors a heavy equity exposure in HSAs. “I allocate more dollars into small caps and emerging markets – those asset classes with more volatility but also more opportunity for growth,” he says, complementing this with some large-cap domestic exposure.
For the more adventurous investor, a growing number of HSA providers are offering brokerage window access, which expands investment choices to include individual stocks. This year, seven providers surveyed by Morningstar, including HealthEquity, Fidelity, and Lively, offer this feature – up from just four in 2023. Be mindful that these options may come with annual fees, either a flat amount or a percentage of assets.
However, Rachel Elson, a CFP and wealth advisor at Perigon Wealth Management in San Francisco, advises simplicity. “You can do a three-ETF model, covering some allocation that includes the U.S. market, and two ETFs for developed and emerging markets,” she suggests. “You don’t need to get super complicated here.”
