A health savings account, or HSA, is one of the most flexible and valuable savings accounts available to U.S. citizens. Used properly, an HSA can save you a lot of money on taxes and ensure you're prepared to handle an emergency medical bill or medical expenses in retirement.

Unfortunately, the vast majority of people eligible to contribute to an HSA aren't taking full advantage of the opportunities it presents.

A person in a doctor's whitecoat with a stethoscope holding a piggy bank.

Image source: Getty Images.

Contribute every year

Your contributions to an HSA are limited each year. If you don't use up the contribution limit one year, you don't have a chance to make up for it later. If you can afford to save money in an HSA, you should, regardless of whether or not you incur any medical expenses in a given year.

Still, 55% of health savings accounts that didn't experience a distribution in 2019 didn't receive any contributions, either, according to a survey from the nonprofit Employee Benefit Research Institute (EBRI). Unlike a flexible spending account, HSA balances roll over from year to year, and the funds can be used at any time.

The tax benefits of an HSA are unmatched. Contributions are tax deductible, and if you contribute through your payroll at work, you won't owe Social Security or Medicare tax on your contributions, either. That can add up to significant up-front tax savings. And if you withdraw contributions to pay for qualified medical expenses, you won't owe any tax on distributions, either.

Invest your funds

Another tax advantage of an HSA is that your funds grow inside the account and won't incur taxes on interest or gains. But if you want to maximize the value of your HSA and that additional tax advantage, you have to invest your funds for the long run.

Just 7% of HSAs analyzed by EBRI held assets besides cash. If you know you have a big upcoming medical bill you'll need your HSA funds to pay for, cash is great for holding its value and ensuring you'll be able to cover your expenses. But if you don't have a pressing need to tap your HSA in the near future, investing in stocks or mutual funds will help build tax-free wealth over time.

Even if your workplace HSA doesn't offer good investing options, you should be able to transfer the account to a provider that does. Fidelity offers an HSA with no significant fees that includes its full brokerage services, giving you the ability to invest in any fund or security the discount broker offers. You may pay a fee to transfer funds out of your workplace HSA, so be sure to limit the number of transfers you make if that's the case. Alternatively, you can do an HSA rollover once every 12 months to try to avoid fees.

How to maximize your HSA

If you aren't already making regular contributions, preferably through your paycheck, set that up as soon as you can. The contribution limit for 2021 is $3,600 for an individual and $7,200 for a family, but you don't have to max that out if you can't afford it. Still, contributing to an HSA, if you're eligible, should be high on the list of savings priorities, just after meeting your 401(k) company match.

Invest your HSA contributions (move your money to a different financial institution if you have to) because it's a great path to build wealth. As mentioned, if you you know you'll have a big medical expense that you'll need the funds in your HSA to pay for, holding that amount in cash is very prudent.

Don't take distributions if you don't have to. There's no rule that says you must pay for medical expenses directly from your HSA. You can hold on to your receipts for years or decades before reimbursing yourself from your HSA. If you can pay for your medical expenses from your regular bank account, that gives investments in your HSA more time to grow tax free.

Withdraw funds when it's most advantageous-- in retirement. Again, the longer you forgo withdrawals, the more time your money has to grow tax free. There's no required minimum distribution on HSA accounts.

If you're lucky enough to never incur significant medical expenses, or your HSA grows well beyond the amount you could expect to spend on medical expenses in retirement, you can start taking distributions for other reasons at age 65 without incurring any penalties. You'll have to pay income tax on the withdrawals that don't go toward qualified medical expenses, but that's the same tax treatment as you get with a traditional IRA.

Using your HSA this way will help you build wealth quickly, lower your tax bill, and ensure you're prepared to handle a medical emergency.