Health Savings Accounts — Key Tips and a Trap

Since their introduction over 20 years ago, Health Savings Accounts (HSAs) have become an important tool to set aside money for medical expenses with some of the most favorable tax treatment available in the tax code. Available to those covered by qualifying high-deductible health plans, HSAs allow employers and employees to contribute pre-tax dollars to an account that can continue to grow over time. Unlike some other health-related accounts, HSAs don't have a "use-it-or-lose-it" rule. Even if you leave your employer, the account is yours and the funds can remain invested or be moved to another provider.

While many HSA owners primarily use the account as a way to pay medical expenses today, there are several strategies worth considering — and a little-known trap to avoid.

Contribute Beyond Your Employer's Deposit. One fairly well-known feature is that you can generally contribute beyond your employer's annual deposit. For 2026, the maximum HSA contribution is $4,400 for individuals and $8,750 for families. If your employer contributes $1,500 to your HSA, that still leaves room to add $2,900 more if you're single. Those age 55 or older by the end of the year can contribute an additional $1,000 catch-up amount.

Choose Your Own HSA Provider. Less understood is that you, as an employee, do not need to stick with the HSA provider chosen by your employer. Many HSAs have high fees and limited investment choices, and it's quite possible your employer did not select the best option for you. Fortunately, you can contribute additional money to an HSA at another custodian of your choosing. Fidelity, for example, is widely regarded as one of the stronger providers in this space.

Using the earlier example, the $2,900 additional contribution could be deposited directly by you into an HSA with another provider. One small caveat: contributions made through payroll have an extra advantage because they avoid Social Security and Medicare tax. If you contribute directly to another HSA provider, you still receive the income-tax deduction, but won't receive that payroll-tax break.

Moving Funds Between HSAs. You can also move funds from your current HSA to another custodian. A direct transfer typically involves opening a new HSA and requesting that the funds be moved from the old provider. This process can take several weeks and you often need to sell the investments inside the account before transferring the balance. An indirect rollover is a quicker option, albeit with a warning: you request a distribution from your current HSA and then have 60 days to deposit those funds into another HSA. Just be careful — an indirect rollover can only be done once every 12 months, and missing the 60-day window could trigger taxes and penalties.

The "Pay Out of Pocket" Strategy. In recent years, more investors have adopted a "pay out of pocket" strategy. Instead of using the HSA immediately, you pay medical expenses from your regular cash flow and save the receipts — preferably digitally and backed up. At some point in the future, you can withdraw funds from the HSA to reimburse yourself for those past expenses. The idea is that the account benefits from additional tax-free growth over time. While this is a compelling gambit for those with extra cash flow and good record-keeping habits, there is a downside to delaying withdrawals.

The Inheritance Trap. Now for the obscure HSA trap that few investors know: The account can be a tax bear to inherit if it passes to someone other than your spouse. Under current law, a non-spouse beneficiary cannot roll the account into their own HSA. Instead, the entire balance becomes taxable income in the year it is inherited. If you left an adult child a $100,000 HSA, they would likely need to report that full amount as ordinary income — potentially pushing them into a higher tax bracket.

Knowing these HSA strategies can help you supercharge an account with lower costs and better investment options. Just remember that you still have until April 15 to make contributions for the previous tax year — another opportunity to take advantage of one of the most tax-efficient savings tools available.

David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. He can be reached at entreewealth.com. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.