Open enrollment is often viewed as an annual health insurance decision, but it can also have lasting consequences for retirement planning. A recent Vanguard report comparing Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) highlights a commonly overlooked difference that could affect long-term savings. One type of account requires participants to use all contributed funds before the end of the plan year or forfeit any remaining balance to the employer. The other allows contributions to be carried forward, invested, and compounded over decades, with no annual deadline putting those funds at risk.That gap matters because health care has become one of the largest financial burdens most retirees face in their post-career years. A retiring 65-year-old may need about $172,500 in after-tax savings just to cover medical expenses, Fidelity’s most recent Retiree Health Care Cost Estimate found.The HSA’s triple tax advantage that Vanguard calls unmatchedThe health savings account stands alone in the tax code because it provides tax benefits at three separate points, Vanguard reported. Contributions are generally made on a pre-tax basis, reducing taxable income in the year they are contributed, while invested balances can grow without incurring taxes on capital gains or dividends.Withdrawals used for qualified medical expenses come out completely tax-free, completing a cycle that no other account type in the code can replicate. Certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts, encourages clients to build six-figure HSA balances and delay spending, he told CNBC.”This is the holy grail of retirement planning,” Galli said, describing the combination of HSA savings with Roth IRA and after-tax retirement funds.Fidelity illustrates the difference with a concrete example over a 30-year timeline for a single initial deposit into each account type. A $1,000 investment growing at 7% annually reaches $7,612 inside an HSA, with zero taxes owed on qualified medical withdrawals at any point. The same amount in a traditional individual retirement account hits $7,612 but leaves only $5,937 after income taxes at a 22% rate, Fidelity calculated.FSA deadline rules that Vanguard says limit retirement savingFlexible spending accounts provide a genuine tax break on current-year medical costs, but their structure prevents any long-term wealth accumulation for retirement, Vanguard noted. Workers who contribute to an FSA must use the entire balance within the plan year or face forfeiture under the use-it-or-lose-it rule, the IRS stated.More Vanguard:Vanguard names 401(k) oversights that hurt your retirementVanguard drops playbook on retirement incomeVanguard warns workers losing thousands in 401(k)sThe FSA is also employer-owned, meaning workers who leave a job generally lose access to remaining dollars after a brief transition window expires.HSA balances belong to the individual, transfer between employers, and remain accessible into retirement with no expiration date on the savings, Vanguard confirmed. Vanguard positions the FSA as a tool for predictable near-term medical costs and the HSA as the account designed for long-term compounding growth.
Vanguard explains why HSAs outperform FSAs for long-term retirement savings, despite both offering valuable tax advantages for healthcare expenses.EmirMemedovski/Getty Images
HSA contribution limits and eligibility rules workers need for 2026The IRS sets annual caps on HSA contributions that adjust each year for inflation and vary by the type of coverage held. Workers with individual high-deductible health plan coverage can contribute up to $4,400 for the 2026 tax year, the IRS confirmed.Those on family plans can contribute up to $8,750, and both limits include all employer contributions alongside personal deposits into the account. Workers aged 55 and older qualify for an additional $1,000 catch-up contribution on top of the standard ceiling, and eligible spouses can do the same.Harrison Newman, a vice president at Corporate Synergies, explained to Money why the new Bronze and Catastrophic plan eligibility matters in practice for workers who previously assumed they didn’t qualify for an HSA. Bronze and catastrophic plans usually come with high deductibles, so confirming HSA eligibility removes confusion and gives people a way to offset out-of-pocket costs… For those on tight budgets, the ability to save pre-tax dollars and reduce taxable income can make health care more affordable.Starting January 1, 2026, Bronze and Catastrophic marketplace plans qualify as high-deductible health plans, expanding HSA eligibility to additional enrollees, under IRS Notice 2026-05.How the HSA works as a penalty-free retirement account after age 65One of the most consequential HSA features involves what happens when account holders turn 65, and Vanguard’s report makes this distinction clear. After that age, non-medical withdrawals no longer face the 20% penalty that otherwise applies to younger account holders, Vanguard explained in the report.Those distributions are taxed as ordinary income, making the account operate much like a traditional individual retirement account at that stage of life. But withdrawals for qualified medical expenses remain entirely tax-free after 65, a benefit that neither 401(k)s nor traditional IRAs can offer.”Health care will likely be one of your top 5 expenses in retirement,” said Steven Feinschreiber, senior vice president of financial solutions at Fidelity. Feinschreiber recommended earmarking a portion of 401(k) and individual retirement account balances alongside an HSA to build a dedicated health care fund, Fidelity reported.HSAs also carry no required minimum distributions, unlike 401(k) plans and traditional IRAs that force withdrawals starting at age 73, Morgan Stanley noted. That distinction lets account holders keep their HSA invested and growing for as long as they choose, pulling from it only when needed.Related: Vanguard’s 25 years of data upend major retirement myth