Make the Most of Your HSA
9/3/2026
Three advanced strategies for retirement, taxes and healthcare costs
In an earlier article, we covered the fundamentals of health savings accounts (HSA), including their unique triple-tax advantages, eligibility requirements and how they can help pay for healthcare expenses in retirement. For many investors, though, that's only the beginning of the story. Because HSA assets can often be invested for long-term growth, the account can become much more than a way to pay current medical bills – it can function as a dedicated healthcare reserve, a valuable tax-planning tool and even a component of an estate plan. If you're already contributing to an HSA, here are three advanced strategies worth considering.
Three Advanced HSA Planning Strategies
- Delay Reimbursement for Future Tax-Free Income
- Build a Retirement Healthcare Reserve
- Add Flexibility to Retirement Income Planning
Delay Reimbursement for Future Tax-Free Income
Many people use their HSA to pay for medical expenses as they occur. But if you're able to cover these costs with other funds, you can leave your HSA assets invested, giving them more time to potentially grow tax-free. Under current rules, qualified medical expenses incurred after an HSA is established can generally be reimbursed later, provided you maintain proper records. As a result, a medical bill you pay today could potentially become a source of tax-free cash years down the road – including in retirement, when you may no longer be earning a regular paycheck.
The key tradeoff is paying healthcare expenses from other funds today in exchange for the potential of greater tax-advantaged growth over time. For investors who don't need immediate reimbursement, that flexibility can make the HSA a powerful retirement planning tool.
Build a Retirement Healthcare Reserve
One of the most challenging expenses many face in retirement is healthcare. While most investors know they will need healthcare throughout retirement, no one knows for sure how much care they'll need, when they'll need it or what those services will cost. Healthcare expenses have historically risen over time and have at times outpaced broader inflation, making it important to prepare for the possibility of significantly higher costs in the future (see chart).
Since 2000, costs for medical care have far outpaced inflation
Source: Federal Reserve Bank of St. Louis.
That's one reason some investors choose to view their HSA as a dedicated healthcare reserve rather than simply another savings account. By keeping those assets invested, investors may have the opportunity for growth that could help preserve the account's purchasing power as healthcare costs rise. These funds may later be used for a wide range of qualified medical expenses, creating a dedicated source of assets for healthcare costs that often increase throughout retirement
Add Flexibility to Retirement Income Planning
Most investors focus on their workplace retirement plan and IRA contributions first, and for good reason. But for investors who are already maximizing contributions to those accounts, an HSA may represent one of the most tax-efficient ways to build additional retirement savings. Unlike many retirement accounts, HSA assets can potentially receive favorable tax treatment when contributed, while invested and when withdrawn for qualified medical expenses.
In addition, HSAs offer flexibility later in life. Before age 65, withdrawals used for non-qualified expenses generally are subject to ordinary income taxes and a 20% penalty. After age 65, however, the penalty no longer applies. While non-medical withdrawals remain taxable as ordinary income, they can be used for any purpose.
This means that even if healthcare expenses end up being lower than expected, HSA assets may still serve as a source of retirement income. While withdrawals used for qualified medical expenses generally remain the most tax-efficient use of the account, the age-65 rule can provide an additional layer of flexibility for retirees.
Additional HSA Opportunities
Many investors think about HSAs only in the context of doctor visits, prescriptions and deductibles. In reality, the account can play a role in several other areas of financial planning.
Medicare Planning
In retirement, HSA assets may be used to help cover certain Medicare-related expenses and qualified long-term care insurance premiums, subject to IRS rules and limits. Because healthcare costs often increase later in life, these provisions can provide additional flexibility when planning for those expenses.
A separate planning consideration involves Medicare enrollment: Once you enroll in Medicare, you generally can no longer make HSA contributions. As a result, investors approaching retirement may want to coordinate contribution strategies and Medicare enrollment decisions to avoid missing contribution opportunities during their final working years.
Estate Planning
Although HSAs are often overlooked in estate planning discussions, their beneficiary designations can have significant planning implications. Spouses who inherit an HSA generally receive favorable treatment and may continue using the account for qualified medical expenses. Non-spouse beneficiaries, however, generally recognize the account's value as taxable income, which means a large HSA balance can turn into an unexpected tax burden for heirs.
Investors who have accumulated significant HSA balances may want to consider how those assets fit within their broader legacy plan and review beneficiary designations regularly.
Funding Opportunities
While most investors fund their HSA through payroll deductions or direct contributions, other options may be available. Some investors may be eligible to make a one-time tax-free transfer from an IRA to an HSA, subject to IRS requirements and annual contribution limits. Because qualified medical expenses generally can be paid from an HSA on a tax-free basis, this strategy may be worth exploring for investors looking to set aside additional assets for future healthcare expenses. HSA contributions also may come from other sources, including gifts from family members or contributions made on behalf of a spouse, provided contribution limits and eligibility requirements are satisfied.
Avoid These Common HSA Mistakes
- Neglecting employer contributions when calculating annual contribution limits
- Failing to maintain records of qualified medical expenses
- Leaving long-term HSA assets in cash rather than investing them
- Missing HSA catch-up contribution opportunities after age 55
- Overlooking how Medicare enrollment affects future contribution eligibility
- Failing to review beneficiary designations
Is an HSA Right for Everyone?
For all of their advantages, HSAs are not the best fit for every investor. To qualify for an HSA, you must be enrolled in a high-deductible health plan. While those plans often feature lower premiums, they can also result in higher out-of-pocket costs, which might be prohibitive for individuals with chronic health conditions, expensive prescriptions or significant recurring healthcare expenses. Our team can help you evaluate whether a high-deductible health plan is right for you, assess the tradeoffs of an HSA and determine how it may support your retirement and healthcare planning goals.
This information has been developed by a member of Baird Wealth Solutions Group, a team of wealth management specialists who provide support to Baird Financial Advisor teams. The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
