Ways to save for future medical expenses tax-free

From insurance premiums and deductibles to copays and prescriptions, healthcare costs can add up fast. But you may not have to cover all your healthcare costs with after-tax money – or even your own income, in some cases. Here’s a breakdown of three accounts you may be able to use to save for future medical expenses that also help you save on taxes.

Health savings accounts (HSAs)

A health savings account (HSA) can be a powerful tool for long-term health planning, as it provides three ways to save on taxes:

Eligibility requirements

To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). Additionally, you can’t be enrolled in a disqualifying health plan – such as Medicare, a non-HSA-eligible plan or a plan that provides overlapping benefits – and you can’t be claimed as a dependent on anyone’s tax return.

Contributions

If you qualify for an HSA, you can contribute up to a set annual limit to your account. In 2026, the limits are $4,400 for self-coverage ($5,400 if you’re 55 or older) and $8,750 for family coverage. For 2027, those limits are $4,500 ($5,500 if 55 or older) and $9,000, respectively. If you have family coverage and both spouses are age 55 or older, you can contribute an additional $1,000 for each spouse ($2,000 total) provided each spouse has their own HSA.

Employers may deduct your HSA contributions directly from your paycheck pre-tax, or you can make after-tax contributions, which you can deduct when you file your tax return each year.

You have until the tax-filing deadline without extensions, generally April 15, to make contributions that count for the prior tax year.

Account growth

Some HSA providers allow you to invest all or a portion of your account balance in stocks, bonds and other securities. However, investing through an HSA often comes with fees and minimum balance requirements. Still, if you plan to use your HSA to cover qualified medical expenses years down the road, such as in retirement, saving pre-tax funds and investing them via an HSA may help you more easily hit your goal.

Withdrawals and reimbursements

HSA funds can be withdrawn to pay for or reimburse qualified medical expenses without triggering taxes. The balance in your HSA rolls over from year to year, and there’s also no deadline for reimbursements, so you can pay for expenses out of pocket now and get reimbursed years later (just keep your receipts).

If you withdraw HSA funds for nonqualified medical expenses or other purposes, however, those withdrawals may be subject to federal income taxes. Additionally, account holders under age 65 may incur a 20% tax on nonqualified withdrawals.

It’s important to keep receipts showing that your HSA funds were spent on qualified medical expenses, in case the IRS audits you. Without receipts, qualified expenses could end up subject to federal income taxes and the additional 20% tax.

Flexible spending accounts (FSAs)

Flexible spending accounts (FSAs) are employer-provided benefit accounts that help employees cover out-of-pocket healthcare expenses.

Eligibility requirements

An FSA may be part of a standard W-2 benefit package that employers offer to their employees. In other words, this is not an account type you can access independently; it’s often one that is offered that you can opt into. You do not need a HDHP to sign up for an FSA.

Contributions

Employees can contribute pre-tax dollars to their FSAs via payroll deductions, and employers may or may not contribute or match employee contributions, depending on the employer. However, contributions to an FSA can’t exceed the annual limit, which is $3,400 per employee for 2026. Any money you don’t use within the plan year cannot be rolled over to the next plan year and you lose it.

Account growth

FSA accounts don’t have growth features, so there’s no chance to earn interest or invest the money for potential growth.

Withdrawals and reimbursements

FSA funds can be used to reimburse account holders for a variety of medical and dental expenses during a plan year, excluding insurance premiums. Employees should check with their employer for the specifics regarding which expenses are covered by their FSA.

Employees generally need to withdraw all the funds in the account for eligible expenses within the plan year, as FSAs don’t typically carry over to the following year. However, employers may offer a grace period of up to 2.5 months or allow employees to carry over up to $660 per year.

Some employers offer limited-purpose flexible spending accounts (LPFSAs), which are pre-tax accounts designed for employees with HDHPs and HSAs. An LPFSA typically covers routine dental and vision expenses, helping employees preserve more funds in their HSAs.

Health reimbursement arrangements (HRAs)

A health reimbursement arrangement (HRA) is another type of tax-advantaged account that reimburses employees for their medical expenses. The two most common subtypes are individual coverage HRAs (ICHRAs) and qualified small employer HRAs (QSEHRAs). While QSEHRAs are designed for small businesses with fewer than 50 employees, ICHRAs may suit companies of any size.

Eligibility requirements

HRAs are employer-provided accounts, so they are available only to the employees of companies that offer them. Not all companies offer them, so check with your employer. Additionally, some HRAs require employees and their household members to be enrolled in a health plan. It’s also important to know that HRA funds may impact your eligibility for premium tax credits.

Contributions

HRAs are solely employer-funded. Employees can’t take payroll deductions or make contributions. Further, there are no contribution limits on ICHRAs, but QSEHRAs are subject to limits that the IRS updates each year. For 2026, employers offering QSEHRAs can contribute up to $6,450 to employees alone, and up to $13,100 to employees and their households.

Account growth

The money in your HRA can’t be invested and does not earn interest.

Withdrawals and reimbursements

Employees can use HRA funds to reimburse themselves for the medical, dental and vision expenses covered by their employer’s HRA plan. Any leftover funds can carry over to the next year. However, if you leave your job, you generally forfeit any remaining HRA funds.

What counts as a qualified medical expense for these accounts?

Qualified medical expenses generally include the costs of preventing or alleviating a physical or mental disability or illness. For example, this might mean payments to physicians, surgeons, dentists and other medical practitioners for equipment, diagnostic services, tests, supplies and medicines. Qualified expenses can, however, vary by account type and provider.

To ensure you understand which medical expenses are qualified on any of the accounts described above, you’ll want to review your provider’s list of approved expenses. It’s also important to understand what you need to do to receive a payment or reimbursement, and to keep documentation of your medical expenses in case you’re ever audited.

Common mistakes involving tax-advantaged healthcare accounts

If you have or plan to sign up for any of these accounts, here are some common mistakes you’ll want to avoid:

How to prioritize accounts

So, which account is best for your situation? If you’re eligible for an HSA, consider starting there. HSAs have favorable tax benefits, ownership structures and the ability to invest the balance for long-term growth. They may serve as a strong foundation for healthcare savings, helping you both now and in the future.

FSAs and HRAs are employer-dependent, so suitability depends on whether your employer offers them. If yours does, they may be worth considering. However, there’s an important coordination rule: If you’re covered by a HDHP and an HRA or FSA, you generally can’t contribute to an HSA.

That said, the IRS does allow you to contribute to an HSA and a limited-purpose FSA or HRA, which restrict reimbursements to dental and vision expenses. When layering these accounts, the HSA may serve as the primary savings vehicle, while the LPFSA or HRA may act as a supplement.

If you don’t qualify to contribute to an HSA, you may want to consider opening a general FSA or HRA through your employer (if these options are available). FSAs may be better than HRAs if you have predictable out-of-pocket medical expenses and want to reduce your taxable income. HRAs, however, don’t reduce your taxable income but may grant more flexibility when employers allow rollovers.

The bottom line

Healthcare costs are expensive and continue to rise each year, but there are ways to reduce what you pay out of pocket. HSAs, FSAs and HRAs are three popular tax-advantaged accounts that may help you save. Each account type has different core benefits and eligibility requirements, though, so the right fit for your situation will depend on factors like your health insurance coverage, employment situation and tax-filing status.

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