An HSA is a savings account that comes with a high-deductible health plan. It has three tax breaks, and most people only use the first one. Here is how it works and how we think about it in a financial plan.
The contribution is deductible, the growth is not taxed, and withdrawals are tax-free when they pay for qualified medical expenses. Your 401(k) gives you the first two and your Roth gives you the last two.
| 401(k) | Roth IRA | HSA | |
|---|---|---|---|
| Contribution is deductible | Yes | No | Yes |
| Growth is tax-free | Yes | Yes | Yes |
| Withdrawal is tax-free | No | Yes | Yes, for qualified medical expenses |
For 2026, you can put in $4,400 with individual coverage or $8,750 with family coverage, plus $1,000 if you are 55 or older.
If you own the practice, the contribution works a little differently than it does for your staff. Your staff can fund it through payroll. Yours runs through the practice and gets deducted on your personal return, and the setup depends on your entity type. Have your CPA set it up the first year, and it runs on its own after that.
Consider a hypothetical example. Dr. Patel owns a single-doctor practice, her family is on a high-deductible plan, and her marginal federal rate is 37%. In January she funds the 2026 family maximum of $8,750.
Hypothetical illustration, not an actual client result. Full assumptions are in the note at the end of this article.
Break one, the deduction - the $8,750 comes off the top of her income, so at 37% her federal tax bill drops by about $3,238 for the year. That tax is avoided for good if the money is later spent on medical costs, and only deferred if it comes out as income after 65. She would get the same deduction from a 401(k) contribution, so on its own this is nothing special.
Break two, the growth - in March she needs surgery. Between the deductible and the coinsurance she hits her plan's out-of-pocket maximum, and for a family high-deductible plan in 2026 that can be as high as $17,000.
She has $8,750 in the HSA, and she has to decide whether to pay the surgery bill from the HSA or from somewhere else.
Option one, she pays from the HSA. It covers about half the surgery, checking covers the rest, and by April the HSA is back to zero. She got the deduction and that was the end of the benefit.
Option two, she pays the full $17,000 from checking or from her taxable account and leaves the HSA alone. She saves the explanation of benefits and the receipts.
The surgery cost the same $17,000 either way, and she got the same deduction either way. The difference is that in option two the $8,750 is still in the account and still invested, with any growth untaxed, and she now has a $17,000 receipt she has not used.
Break three, the withdrawal - the IRS does not put a deadline on reimbursing yourself for a qualified medical expense. The only requirement is that the HSA was open when you paid the bill.
So she can withdraw up to $17,000 tax-free against that surgery whenever she wants, next year or in retirement. Every medical expense she pays out of pocket from here on adds to that total, as long as she keeps the documentation.
That is what turns a health account into a retirement account. The money stays invested for twenty or thirty years, and when she wants some of it, she takes a tax-free withdrawal against expenses she already paid. After 65 she does not need a documented expense at all, which I will get to below.
Obviously, there is nuance here. Paying a $17,000 surgery bill from checking is a cash flow decision, and it is the right move when most of these are true:
If you are in the second group, pay the bill from the HSA. The deduction is still real, and the HSA still beat paying the bill with after-tax dollars.
Your HSA provider holds the cash and offers its own menu of funds. That menu is fine for a small balance, but it sits outside your financial plan, and we cannot see it or manage it there.
Schwab has a solution for this. Three HSA providers, Optum, Lively, and WEX, let you open a Schwab Health Savings Brokerage Account (HSBA) that links to your HSA. The invested portion moves to Schwab, and we manage it the same way we manage your other accounts, as part of one allocation. Each provider has its own cash minimum before you can invest, so the link makes sense once the balance is past a few thousand dollars.
Here is where to start with each one:
Once you turn 65, the 20% penalty on nonmedical withdrawals goes away. From that point on the HSA works two ways at once.
For medical expenses, it is still the tax-free account it always was. Expenses from any prior year still count, and Medicare premiums other than Medigap are qualified expenses.
For everything else, it works like a traditional IRA. Take out $20,000 for a trip, a car, or living expenses, and you pay ordinary income tax on it with no penalty. That means the account does not have to be earmarked for medical costs at all. If you have funded it for twenty years and your documented expenses do not cover the balance, the rest is supplemental retirement income, and it was deductible on the way in with any growth untaxed the whole time.
Unlike a traditional IRA, an HSA has no required minimum distributions, so you are never forced to take money out on a schedule. Take tax-free withdrawals against documented expenses first, take the rest as income when you need it, and leave what you do not need invested.
Two rules to know before you get there:
You need to be covered by a qualifying high-deductible health plan. The list of qualifying plans got longer this year.
The HSA gets ignored because the balance is small and it is easy to spend. Fund it every year, invest it, and it becomes a second retirement account with a better tax result than the first one when the money goes to medical costs. Pay your medical bills from checking and keep the documentation, and the money comes out tax-free whenever you need it. If it fits your cash flow, it is one more account you can use to get more out of your household's savings as a whole.
For Current Virtus Clients:
If questions on your personal situation outside of your annual review, please reach out to your Advisor directly.
For Non-Clients with Questions on Your Personal Situation:
Use the link below to reach out to us and an Advisor will contact you to schedule a complimentary consultation.
Yes, as long as the HSA was open when you paid the bill and the expense qualified at the time. There is no deadline on reimbursement.
Keep the receipt and the explanation of benefits, because you will need both if the IRS ever asks how a withdrawal qualified.
Before 65, a nonmedical withdrawal is taxed as ordinary income plus a 20% penalty. After 65 the penalty goes away and the withdrawal is taxed like a traditional IRA distribution, so the account can be used as supplemental retirement income.
Withdrawals for qualified medical expenses are tax-free at any age, and an HSA has no required minimum distributions.
Yes. You can open an HSA with any provider you choose and transfer the balance from your current one. A direct transfer between HSA providers is not a rollover, so there is no limit on how many you can do and nothing to report on your tax return.
If your employer contributes through payroll, keep that account open, so the contributions keep flowing, and transfer the balance to the new HSA once or twice a year.
If your HSA provider links to Schwab's Health Savings Brokerage Account, the invested portion can move to Schwab and be managed with your other accounts. Optum, Lively, and WEX currently offer that link, and each provider's site is linked in the article above.
Dr. Patel is a hypothetical, not a client. The example assumes a 37% federal marginal tax rate, the 2026 family HSA limit of $8,750, and a surgery that reaches the 2026 family out-of-pocket cap of $17,000 for a high-deductible health plan. It shows tax treatment only and assumes no investment return. Your tax rate, plan limits, and results will differ.
Virtus Financial Partners is an investment advisor registered with the U.S. Securities and Exchange Commission; registration does not imply a certain level of skill or training. This content is for educational purposes only and does not constitute personalized investment advice, and Virtus does not provide legal or tax advice. Virtus receives compensation for the advisory services it provides. Certain Virtus representatives are also licensed insurance agents who may offer insurance products in a separate, non-advisory capacity for commissions, which presents a conflict of interest. Past performance is not indicative of future returns. Information is current as of the date published and is subject to change. You should consult your own attorney, CPA, and financial advisor regarding your specific situation.
