Health savings accounts have become popular workplace perks with significant tax-advantaged investment opportunities — but many Americans have no idea how they work. 

About 26 million people had an HSA at the end of 2023, according to Devenir, a research and investment firm based in Minneapolis. Assets in these accounts reached about $137 billion by this June, and are expected to grow to $175 billion by the end of 2026.

“We definitely are seeing growth in the number of people who sign up,” said Todd Katz, executive vice president of group benefits at MetLife. Strong market performance has also spurred growth of the investments in HSA accounts, helping to boost balances.

Still, 50% of U.S. adults don’t understand how HSA’s work, according to a survey by Empower, a financial services company. Only 34% of employees with access to an HSA have enrolled in the benefit, and just 24% who have enrolled have funded their accounts, according to MetLife’s U.S. Employee Benefits Trends Study conducted in September 2024.

That can be an expensive miss: HSA benefits are “unmatched, really, relative to Roth IRAs or 401(k)s,” said Christine Benz, director of personal finance and retirement planning at Morningstar. “You just don’t see tax benefits like that.”

Here’s what to know about HSAs, and how to take advantage:

HSAs are tax-advantaged accounts for health expenses. Funds roll over from year to year, and the account comes with you if you change jobs. HSA money can also be invested.

To be eligible to contribute to a health savings account, an individual must be enrolled in a high-deductible health plan, or HDHP. For 2025, the Internal Revenue Service defines that as any plan with an annual deductible of at least $1,650 for an individual or $3,300 for a family. The maximum out-of-pocket expenses for an HDHP are $8,300 for an individual or $16,600 for a family. 

A saving, spending and investment account, HSAs offer three ways to save on taxes.

“You’re able to put pre-tax dollars into your health savings account. As long as the money stays within the confines of the HSA is it is not taxed,” said Benz, the author of “How to Retire.” “And then, assuming that you pull the funds out and use them for qualified health care expenses, those funds aren’t taxed either. So you earn a tax break every step of the way.” 

In 2025, eligible individuals can contribute to a HSA up to $4,300 or $8,550 for family coverage.

Also, if you take money from your HSA for a non-medical expense, you have to pay federal income tax and a 20% tax penalty on the money withdrawn. Accountholders age 65 and older can avoid that penalty, but will still pay income tax.

There’s a lot to think about, so experts say take the time to weigh the pros and cons of the options.

A new report from Voya Financial finds 91% of working Americans pick the same health plan from the year before. But experts say it can pay to crunch the numbers. 

“If you’re somebody who has to go to the doctor all the time, you know you’re going to meet your deductible, you probably want to go with a copay plan, but you need to run the numbers,” said Carolyn McClanahan, a physician and CFP based in Jacksonville, Florida. She’s a member of CNBC’s Financial Advisor Council.

Benz agrees, adding that “successfully using the high deductible plan very much rests on taking advantage of that health savings account.”

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A tax credit for low- to middle-income individuals and families — the earned income tax credit, or EITC — will have higher maximum amounts in 2025.

The earned income tax credit helps qualifying individuals and families reduce the amount of tax they owe, while also potentially providing a refund, according to the IRS.

In 2025, the maximum EITC amount will be $8,046 for qualifying taxpayers with three or more eligible children. That is up from $7,830 for tax year 2024.

The maximum amount available for qualifying taxpayers with two eligible children will be $7,152, up from $6,960 in 2024; one qualifying child, $4,328, compared to $4,213 in 2024; and no qualifying children, $649, up from $632 this year.

To qualify for the tax credit, individuals and families must be under certain thresholds for adjusted gross income — defined as total income excluding any eligible deductions.

In 2025, the maximum AGI to qualify for the EITC for married couples with three or more children will be $68,675, up from $66,819 in 2024; and for single, head of household and widowed filers with three or more children will be $61,555, adjusted from $59,899 this year. The EITC is also subject to phaseout thresholds.

Taxpayers are also limited to how much investment income they can have in order to qualify for the earned income tax credit. In 2025, that threshold will go up to $11,950, up from $11,600 in 2024. If investment income is above $11,950 in 2025, taxpayers will not qualify for the credit.

Investors can generally reduce their tax losses in a portfolio by using exchange-traded funds over mutual funds, experts said.

“ETFs come with tax magic that’s unrivaled by mutual funds,” Bryan Armour, Morningstar’s director of passive strategies research for North America and editor of its ETFInvestor newsletter, wrote earlier this year.

But certain investments benefit more from that so-called “magic” than others.

Mutual funds are generally less tax-efficient than ETFs because of capital gains taxes generated inside the fund.

Taxpayers who sell investments for a capital gain (i.e., a profit) are likely familiar with the concept of paying tax on those earnings.

The same concept applies within a mutual fund: Mutual fund managers generate capital gains when they sell holdings within the fund. Managers distribute those capital gains to investors each year; they divide them equally among all shareholders, who pay taxes at their respective income tax rate.

However, ETF managers are generally able to avoid capital gains taxes due to their unique structure.

The upshot is that asset classes that generate large capital gains relative to their total return are “a primary use case for ETFs,” Armour told CNBC. (This discussion only applies to buying and selling within the fund. An investor who sells their ETF for a profit may still owe capital gains tax.)

ETF and mutual fund dividends are taxed similarly. ETF dividends are taxed according to how long the investor has owned the fund.

Actively managed stock funds are also generally better candidates for an ETF structure, Fitzgerald said.

Active managers tend to distribute more capital gains than those who passively track a stock index, because active managers buy and sell positions frequently to try to beat the market, he said.

However, there are instances in which passively managed funds can trade often, too, such as with so-called “strategic beta” funds, Armour said.

Bond ETFs also have a smaller advantage over mutual funds, Armour said. That’s because an ample amount of bond funds’ returns generally comes from income (i.e., bond payments), not capital gains, he said.

Fitzgerald says he favors holding bonds in mutual funds rather than ETFs.

However, his reasoning isn’t related to taxes.

During periods of high volatility in the stock market — when an unexpected event triggers a lot of fear selling and a stock-market dip, for example — Fitzgerald often sells bonds to buy stocks at a discount for clients.

However, during such periods, he’s noticed the price of a bond ETF tends to disconnect more (relative to a mutual fund) from the net asset value of its underlying holdings.

The bond ETF often sells at more of a discount relative to a similar bond mutual fund, he said. Selling the bond position for less money somewhat dilutes the benefit of the overall strategy, he said.