HSAs and FSAs: Maximizing those employer acronyms
HSAs (Health Savings Accounts) and FSAs (Flexible Spending Accounts) are some of the most popular accounts in the financial planning world, and with good reason. The goal of this article is to have you walk away confident in how you can maximally benefit from these accounts, but also share why I think many financial experts overhype the HSA, specifically. As always, none of this is personal investment or financial advice, but educational content.
HSAs
Most of this article is going to be spent on HSAs, because they are frankly a lot more nuanced than an FSA. An HSA is a financial account associated specifically with high deductible health insurance plans that you use to pay for qualified health expenses.
If you’ve heard someone talking about HSAs on TikTok, what they’ve likely said is that “the HSA is the best account because it is the only financial account that has a triple tax advantage.” And the triple tax advantaged part is true if used correctly! What that means in plain English:
No taxes paid when the money goes in (i.e., tax deductible)
No taxes paid on the investment growth (you can actually invest the money in your HSA)
No taxes paid when withdrawn for qualified medical expenses
This is indeed, pretty great. If your employer offers this option and it works well with your situation, it can be an extremely powerful way to grow your wealth. And later on in this article, I’ll share a method of making this last long after you’re on that employer health plan (max optimization).
BUT where I take issue with HSA-pumping TikToks is the idea that this is a no-brainer for anyone who has access to the account. As you’ll recall, the HSA is directly associated with a high deductible healthcare plan (HDHP). You can only make contributions to the HSA when you are enrolled in a HDHP, although the account can still stay open and eligible for withdrawals after you leave said HDHP.
The big point I want to make here is that picking the right health insurance plan is more important than getting access to an HSA. If a HDHP does not work well for you and your family, that may be far more consequential than getting some tax free growth in the S&P 500. Here are some general criteria that might indicate a HDHP isn’t for you:
Poor cash flow: HDHPs can require you to pay a high amount front-loaded at the beginning of the year if you have high beginning of year costs. Your bi-weekly paycheck contributions may take a long time to catch up, and you don’t want to go into debt paying for your surprise medical visits.
You have frequent healthcare needs: it’s called a high deductible plan for a reason. If you’re in a phase of life where you / your family are visiting the doctor a lot, your out of pocket costs may far outweigh any future tax advantages of the HSA.
Having the HSA influences your health decisions: this is a sneaky one rarely talked about. With an HSA account, the money is yours to keep if you don’t use it. Are you the type of person that may ignore that nagging pain in your stomach to avoid paying the co-pay and keeping your HSA money? If you are, you need to really reconsider what is important to you.
Okay, rant is over. Now the more fun things.
Maximally optimizing your HSA
I will first make a fairly basic but often missed point: your HSA account won’t grow if you leave the money in cash. You actually need to be surprisingly proactive about this on some platforms. My HSA account is with Fidelity, and while you’d think they would bother you more about investing those funds, they actually don’t (I’m sure it has nothing to do with net interest margin being their biggest profit driver).
So, Step 1: make sure it’s invested if that’s how you want to use the account.
This is where most people stop, but oh does it get so much better.
You can use your HSA funds for qualified medical expenses at any point in your life after the account has been opened. It does not need to be during the same period of time you were under that health plan. So, if you have the funds to manage it, the financial nerd approach is the following:
Fund the HSA and invest the money
Pay your health bills out of pocket (not touching your HSA)
Keep track of your health receipts (a digital folder you know you won’t lose would work)
In retirement once the HSA has (hopefully) grown for 30 years tax free, dig into that receipts folder and get that tax free money
The obvious financial benefit here is by deferring the withdrawals, you are getting more investment growth that is totally tax free. I’m too tired to draw up the math examples for you (I was on vacation this weekend, like I said), but trust me, tax free investment growth is a good thing.
However, the less discussed benefit of this approach is you create huge optionality in your retirement fund withdrawal strategy. Let’s consider the following:
You’re 73 and need to start taking Required Minimum Withdrawals (RMD) from your IRA, and you’re also pulling in Social Security (SS)
Both of these create taxable income during retirement
Should you need to withdraw additional funds beyond your RMDs and your SS checks, this could elevate you into a tax bracket that creates some major retirement planning headaches
Enter the HSA: these funds are tax free and not considered income, so in years when your base level retirement taxable income is higher, the HSA can be leveraged as a pool of non-taxable withdrawals, similar to a Roth IRA.
Apologies in advance for that retirement planning nerd moment, but if you’re like me, you think it’s pretty cool. So yes, while you need to be very thoughtful about picking your health plans, if it’s right for you, an HSA rocks.
FSAs
An FSA is worth covering here because it is also in the category of health-related employer accounts. However, you can usually not have both a Traditional FSA and an HSA at the same time. What you can have at the same time is an HSA and a Dependent Care FSA.
FSAs allow the user to contribute funds tax free, and withdraw those funds throughout the year for qualified medical expenses. Overly simplified example: you have a 24% top tax rate bracket, contribute $3,000 to the FSA, use the entire thing → that $3K in qualified expenses basically gets a 24% discount.
The FSA is nice, but the Dependent Care FSA can be much more impactful, and for most people is more of an easy choice since you can use it with an HSA, and it can go towards daycare / nannies.
In 2026 the Dependent Care FSA got a new contribution limit of $7.5K for married filing jointly couples. Critically, these accounts are “use it or lose it” in the same calendar year, unlike the HSA, which lives on for years after.
For readers with children, I’m sure you’re wondering how you could possibly spend $7.5K on daycare in a year?? Things are so affordable and childcare is so easy to come by! [Insert Borat “NOT” meme]
Taking the Atlanta average, most parents will hit that $7.5K limit with only a single child in less than 5 months. I REALLY don’t like to use words like “always” when talking about finances, so I won’t, BUT, if you are paying for childcare, contributing the max $7.5K/yr to a Dependent Care FSA will almost always make sense (I said “almost”).
In closing
Leveraging the HSA and Dependent Care FSA together can be very powerful tax tools, but can be taken to the next level if you’re highly intentional about your long-term strategy with the accounts. If you’d like to better understand how these accounts may apply to your personal situation, let’s talk.
