Millennials on track to retire early are maxing out HSAs to supplement their savings. Here's who is eligible for this account and how to use it to grow your money.

• Financially savvy millennials are maxing out HSAs to supplement retirement savings.
• HSAs require enrollment in a high-deductible health plan, suitable for healthy individuals.
• In 2024, individuals can contribute up to $4,150 in an HSA.

When Amberly Grant started making enough money to invest, she opened and maxed out three different accounts: a 401(k), a Roth IRA, and an HSA.

The first two are common retirement-specific accounts. The latter, a health savings account, is meant to be used for health costs, but financially savvy individuals are investing the funds in this account and using it to supplement their retirement savings.

Grant, who is pursuing early retirement, says she's maxed out the account for the past seven years. The IRS adjusts the annual contribution limit each year. In 2018, when Grant started using an HSA, individuals could contribute up to $3,450; in 2024, the limit is $4,150.

What she likes in particular about an HSA is that it offers a triple tax benefit: You can contribute pretax dollars (reducing your taxable income), your contributions and earnings grow tax-free over time, and you can withdraw your money tax-free to cover qualified medical expenses (including things like copays, lab fees, and vaccines).

If you withdraw money for something other than a qualified medical expense, you'll pay ordinary income taxes on the withdrawal and owe a 20% early withdrawal penalty — that's if you're under 65. After 65, you can use your HSA money to cover any expense without incurring a penalty, but the funds are subject to income tax.

Brennan and Erin Schlagbaum, who paid off more than $300,000 worth of debt before building a seven-figure net worth, also recognize the benefits of this specific account. Brennan told BI that he has their investments spread across seven types of accounts and that, "my HSA is my favorite by far."

Who is eligible to open an HSA?

To use an HSA, you have to be enrolled in a high-deductible health plan (HDHP), a type of health insurance that typically has lower monthly premiums but higher out-of-pocket costs. It was introduced in 2001 (a couple of years before HSAs made their debut in 2003) to make health insurance more affordable.

While it offers a lower premium (the amount you pay for your health insurance every month), it also comes with a higher deductible as the name suggests. The latter is what you pay out-of-pocket before insurance kicks in.

For that reason, it's not the best option for everyone. If you have an existing health issue and see a doctor frequently, or you're preparing for a major medical expense such as surgery or having kids, this might not be the best plan type for you.

HDHPs are typically well suited for very healthy people who don't plan on seeking medical care frequently and can afford to pay the deductible upfront if they have a medical surprise.

Grant, for example, meets those requirements. "I decided to get a high deductible health plan because I was young, healthy, and I didn't expect my medical expenses to be too high," she said.

The key to maximizing HSA gains

If you want to use an HSA to build wealth over time like Grant and the Schlagbaums are doing, there are essentially two steps to take.

One, invest your HSA funds. When you contribute to your HSA, it'll sit in a cash account and be readily available for you to use with a debit card. You'll have to move your money from your HSA to your HSA investment account. Note that providers may require you to reach a certain amount before you can invest (and you may need to maintain that cash balance).

Your investment options will vary depending on your provider. You'll want to spend some time researching what's available to you. Grant and the Schlagbaums subscribe to index fund investing. Brent Weiss, a certified financial planner, told BI that he invests his HSA money in a target-date fund: "I'm not getting fancy. I'm not trying to beat the market. It's a super-simple way to invest your money and not have to worry about it every day, week, month, or quarter."

Once you've invested your money, avoid touching it and let it grow tax-free over time. Say you opened an account at age 25 and deposited $100 each month into an S&P 500 index fund. Assuming an 8% return, by the time you hit 60, you'd have over $200,000 in that account alone. If you deposited $345 a month (roughly the max you can contribute as an individual in 2024), you'd end up with over $700,000 by 60.

Not touching your HSA funds means covering your medical expenses out of pocket, which is what Grant and the Schlagbaums do. They also save all of their receipts from health-related expenses. That way, they can reimburse themselves from their HSA at any time if they need to.

The Schlagbaums save every health-related receipt in an email folder and track their health-related expenses in an Excel spreadsheet.

"The Excel template says the date, the time, what it was for, and the amount, and then I can cross-reference to my email folder," explained Brennan. "So in the future, I could pull, let's call it, $30,000, theoretically. I'm not going to; I'm going to let it sit there and invest. That's the whole point."

Have you used an HSA to save for retirement? We want to hear from you! Email kelkins@businessinsider.com to share your story.