Contributing money to your Thrift Savings Plan is a good thing, actually a great thing! But there is one account that should probably be funded before maxing TSP.
It makes a lot of sense to contribute to a Health Savings Account (HSA) prior to contributing the maximum to your TSP. An HSA is an account designed for individuals with a high deductible health plan (HDHP), and FEHB offers HDHPs that qualify.
Why fund an HSA before maxing your TSP?
They are triple tax free! Compliance hates it when advisors say things like free or tax free, but Health Savings Accounts (HSAs) are literally triple income tax free. You don’t pay taxes on contributions, money grows income tax free and comes out income tax free if it’s used for healthcare expenses.
Don’t stop contributing to TSP!
Notice that I said to start an HSA before maxing your TSP. It is important that all FERS employees contribute at least 5% to TSP to get the full agency match. Then and only then is it acceptable to make contributions to an HSA. For more on getting the most out of your TSP, see 9 ways to maximize your Thrift Savings Plan.
How much can you contribute to an HSA in 2026?
The maximum contribution to an HSA for 2026 is:
- Self only: $4,400
- Family: $8,750
- Age 55 or older: an extra $1,000 catch-up
If you are in an FEHB HDHP, part of your premium is deposited into your HSA automatically each pay period (the “premium pass-through”). That deposit counts toward the limit, so subtract it before figuring out how much you can add on your own. You can add the rest through pre-tax payroll allotments or by contributing directly to the account.
7 things federal employees should know about HSAs
1. You don’t have to use your contributions every year. Many people get HSAs confused with a Flexible Spending Account. While the two are similar, they are NOT the same. Health Savings Accounts don’t require you to use your contributions every year like FSAs do. Your contributions can stay in the plan from year to year. (If you have an HSA, a general-purpose health care FSA through FSAFEDS isn’t allowed; a limited expense FSA for dental and vision is.)
2. No FICA taxes are paid on HSA contributions made through payroll. FICA (Federal Insurance Contributions Act) taxes are paid on earned income, with the Social Security portion applying up to a limit of $184,500 in 2026. Employees pay a total of 7.65% of income in FICA taxes. Employees pay FICA on all TSP and 401(k) contributions, but not on pre-tax HSA contributions that are deducted from your paycheck. Contributions you make directly to the HSA are deductible on your tax return but don’t avoid FICA.
3. You don’t pay any taxes! HSA contributions are pre-tax or tax deductible, and withdrawals are tax free if used for qualified medical expenses. Again, pretax dollars that can be withdrawn tax free!
4. HSA contributions can grow. Most HSAs will allow you to invest your contributions in mutual funds and exchange traded funds. Investing the funds can help with tax-free growth in your account.
5. HSA contributions can be used for retirement income. If your contributions don’t get used for health-related expenses, you can use your HSA to provide retirement income. Once you turn 65 you can make withdrawals for any purpose and pay income taxes just like you do from an IRA, with no penalty. Medical withdrawals stay tax free at any age, which makes an HSA a nice complement to a tax-free retirement strategy.
6. You can name a beneficiary. An HSA will pass on to your named beneficiary at your death, but the rules are a little different than they are for an IRA. The ideal scenario is to name your spouse as beneficiary so that the spouse can use the HSA for their own medical expenses (they don’t need a high deductible health plan to be able to use funds from the HSA). A non-spouse beneficiary generally has to include the balance in taxable income in the year of death.
7. You can delay taking distributions out tax free. One clever way of allowing your HSA more time to compound and getting tax free income in retirement is to delay distributions. If you can pay health expenses out of pocket while you are working, it may be beneficial to save your receipts and take tax free distributions once you retire. For example, if you have accumulated $30,000 in qualified health expenses while working, once you turn 65 you could take the $30,000 out of your HSA income tax free.
When do HSA contributions have to stop?
You can only contribute while you are covered by an HSA-eligible HDHP and are not enrolled in Medicare. Once you enroll in any part of Medicare, contributions must stop, although you can keep spending the money you already saved. That is one more thing to plan around when you make your benefits decisions at FERS retirement, and it ties into whether taking Medicare Part B makes sense for you.
If you haven’t looked at them before, this year’s FEHB Open Season could be the time to look at a high deductible health plan and an HSA.
If you would like help fitting an HSA, your TSP and your other benefits into one plan, you are welcome to schedule an introductory call with me.
Brad Bobb, CFP®, Bobb Financial, is an expert in federal benefits and retirement planning for federal employees.
This article is for educational purposes only and is not individualized financial advice. Figures are illustrative.