Health savings account (HSA): rules, limits and investing in 2026

Basics7 min read · updated 2 November 2026 · 5 sources

A health savings account (HSA) is tax-free on the way in, while it grows and on the way out, as long as the money pays for medical care. Few people use it that way: most spend the balance every year and leave it in cash. Used as a long-term investment account for future health costs, an HSA can be worth more than a 401(k) dollar for dollar. This article explains who qualifies in 2026, the new rules for bronze plans and direct primary care, and how to use an HSA for retirement.

Who can open an HSA

To contribute, you need coverage under a high-deductible health plan, no other health coverage that pays before the deductible, and you must not be enrolled in Medicare (IRS Publication 969 2025). For 2026, a plan counts as high-deductible if its deductible is at least $1,700 for self-only or $3,400 for family coverage and out-of-pocket costs are capped at $8,500 or $17,000 (Rev. Proc. 2025-19 2025).

Three changes from the 2025 tax law widen the circle. Since 2026, bronze and catastrophic plans available on an Exchange count as HSA-compatible, even if bought outside an Exchange. People in certain direct primary care arrangements can contribute and pay the periodic fees from the HSA tax-free. And telehealth before the deductible no longer disqualifies a plan, permanently (IRS, HSAs under the OBBBA 2025).

The triple tax advantage

• Contributions: deductible on your return, or made before tax through payroll if your employer offers it.
• Growth: interest, dividends and gains inside the account are not taxed.
• Withdrawals: tax-free when used for qualified medical expenses, at any age (IRS Publication 969 2025).

The limits come from Rev. Proc. 2025-19 (2025) and include employer contributions; the extra $1,000 from age 55 is set in the law (IRS Publication 969 2025). Unused money carries over from year to year, and the account stays with you if you change jobs or stop working (IRS Publication 969 2025). Someone who becomes eligible during the year can still contribute the full amount if they are covered on December 1, but must then stay eligible through the following year, or the extra amount becomes taxable plus a 10% additional tax (IRS Publication 969 2025).

Spend it or invest it

Most accounts are used like a checking account for doctor's bills. In the database of the Employee Benefit Research Institute, covering 15.2 million accounts at the end of 2024, the average balance was $5,532, more than half of account holders took money out during the year, and only 18% held any investments beyond cash (EBRI, HSA data 2026).

The alternative is to pay current medical bills from your regular budget, keep the receipts and leave the HSA invested, for example in a broad stock index fund, as long as retirement is far away. Any qualified expense incurred after the HSA was set up can be reimbursed from it tax-free later; expenses from before the account existed do not qualify (IRS Publication 969 2025). The receipts work like a tax-free withdrawal option you can use in any year, including a year with a large unexpected expense.

How much to keep in cash depends on the deductible. One approach is to hold about one year's out-of-pocket maximum in cash or a money market fund within the HSA or the emergency fund and invest the rest; options for safe cash are compared in money market funds vs. T-bills.

An HSA after 65

From the first month of Medicare enrollment, you can no longer contribute (IRS Publication 969 2025). The account itself continues. Before 65, withdrawals for anything other than qualified medical expenses are taxable and cost an additional 20%; from 65, or after disability, the additional tax no longer applies and such withdrawals are simply taxed as income, like those from a traditional IRA (IRS Publication 969 2025).

That makes an invested HSA a retirement account with an extra option: tax-free for health costs, which tend to rise with age, and taxed like a traditional IRA for everything else. Unlike a traditional IRA, an HSA has no required minimum distributions, so the money can stay invested until it is needed.

Where an HSA fits in the savings order

1. Emergency fund: a few months of expenses in cash, so that the HSA does not have to be spent on the first bill.
2. Employer match in the 401(k): an immediate return that no account beats; see 401(k) vs. IRA.
3. HSA up to the limit: for those eligible, the tax treatment is better than that of a 401(k) or IRA as long as the money ends up paying for health care.
4. Further 401(k) or IRA savings, traditional or Roth depending on today's and the expected future tax rate; see Roth vs. traditional.

A high-deductible plan only makes sense if it fits your health costs. For someone with large regular expenses, a plan with a lower deductible can cost less overall even without the HSA, so the plan comes first and the account second.

State taxes

Most states follow the federal treatment, but not all. California law has no provisions comparable to the federal HSA rules, so contributions are added back on the California return and the account's income is taxable there (FTB, analysis of AB 781 2025). Residents of such states still keep the federal advantages.

Common mistakes

• Leaving the balance in cash for decades: an HSA in cash earns little; the tax advantage on growth only helps if there is growth.
• Throwing away receipts: without proof of qualified expenses, a later withdrawal is taxable.
• Contributing after enrolling in Medicare: contributions from the first month of Medicare are excess contributions.
• Withdrawing for non-medical costs before 65: income tax plus 20% additional tax.
• Choosing a high-deductible plan only for the HSA: the plan has to fit your expected medical costs first.

This article explains general federal rules for 2026 and is not tax, health insurance or investment advice. Plan rules, state taxes and HSA providers differ; check your plan documents and the provider's investment options and fees.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.