Healthcare expenses are almost unavoidable — we all have to grapple with them at times. But thankfully, there are ways to set money aside for those bills in a tax-advantaged manner.

One account it pays to use, if you can, is a health savings account, or HSA. Eligibility to participate hinges on your health insurance plan: You need to meet deductible and out-of-pocket maximum requirements that change yearly. But if you do qualify, these accounts provide some major tax benefits.

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A recent study, however, found that most HSA participants aren’t taking full advantage of one big benefit those accounts offer. And that’s a big problem.

Are you letting a big HSA perk go to waste?

HSAs offer three distinct tax benefits:

• Contributions are tax-free
• Withdrawals used for qualified medical expenses are tax-free
• Investment gains on funds in those accounts can be withdrawn tax-free

It’s that last benefit that far too many people are passing up.

In 2023, only 18% of HSA participants were investing their balances, according to the Plan Sponsor Council of America. And part of the reason why may be a common misconception about HSAs.

Many people are familiar with flexible spending accounts (FSAs), which also give you a tax break on contributions and let you withdraw funds tax-free for qualifying medical expenses. But the challenge with FSAs is that typically, the account holder has to deplete all the money in them within the year it was deposited. Otherwise, they’ll forfeit the remaining funds. Some employers may give employees a two-and-a-half month grace period, or the ability to carry over $660 from one year to the next. But beyond that, if you don’t use your FSA money, you lose that FSA money.

HSAs work differently: Your money never expires, and contributions don’t have to be used up within a given plan year. In fact, HSAs encourage you not to use up your balance. They offer you the option to invest those funds for as long as you like and enjoy tax-free gains in the process. However, if you make a withdrawal for a non-medical purpose, not only will you have to pay income taxes on the money, you’ll incur an additional 20% tax penalty.

Because an HSA isn’t a retirement plan per se, many people use their balances regularly to cover medical bills as they arise. But one of the best ways to put an HSA to great use is to invest the funds in the account, and carry a balance into retirement.

Attempting to do this gives you two benefits. First, it means you’ll have more funds in an account earmarked for healthcare expenses during a period in your life when your medical bills might be higher. Also, the longer you carry an HSA balance, the more it might grow.

Use your HSA wisely

While there’s nothing wrong with tapping your HSA for near-term healthcare expenses — that’s what it’s designed for, after all — if you can afford to leave your balance alone and keep it invested, that’s a better bet. Once you turn 65, the tax code no longer penalizes you for taking non-medical withdrawals from HSAs. From that point forward, you can basically treat an HSA like a traditional retirement savings plan.

To be clear, if you’re 65 or older and take an HSA withdrawal for a non-medical reason, you’ll still have to pay standard income taxes on that money. But that’s no different than a traditional IRA or 401(k).

It’s not so surprising to learn that most people with HSAs aren’t investing the money in those accounts with an eye on the long term. But that also means that far too many people are missing out on a great opportunity to enjoy tax-free gains. If you have money sitting in an HSA, make sure you’re not making that same mistake.

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