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How to Use HSAs to Your Advantage in Retirement

Rising medical expenses are a fact of life in the United States. Accordingly, health care costs have become an increasingly important aspect of planning for retirement.

Health Savings Accounts (HSAs) are an attractive option to help retirees cover out-of-pocket medical expenses. They have significant tax advantages, they’re flexible, and you can use them for a wide variety of health care costs. For these reasons, you may want to consider an HSA as part of your retirement portfolio. Here’s how to make the most of this retirement tool. 

What Are Health Savings Accounts?

As the name implies, Health Savings Accounts, or HSAs, are tax-advantaged savings accounts intended to cover medical expenses. They’re available to anyone with a high-deductible health plan, regardless of whether the insurance is an employer-sponsored plan. There are two ways to fund an HSA: 

  • Employer contributions from pre-tax income
  • Funds you contribute yourself, which are tax-deductible 

With both types of contributions, your account balance grows tax-free without any tax on capital gains, and distributions used properly are nontaxable. Yep, you read that right—a triple tax advantage.

Much like other retirement accounts, there are restrictions on using the funds. Luckily, the list of qualified medical expenses is broad and includes things that aren’t usually covered by medical insurance, such as:

  • Deductibles
  • Select prescriptions 
  • Dental work
  • Vision care 

A few caveats: If you use your HSA savings for unqualified purposes, withdrawals will count as taxable income. If you’re under 65 and you use the money for non-qualified expenses, you’ll also incur a stiff penalty from the IRS. Additionally, you’ll lose out on both the tax-free growth potential of leaving the money untouched until retirement.

Benefits of HSAs

The flexibility of covering medical expenses is useful, but HSAs have an even bigger draw in their value as a retirement investment vehicle. The mechanics of HSAs are similar to other types of accounts such as 401(k)s or IRAs, with some unique added benefits:

  • Triple Tax Advantage - Funds are not taxed at the time of contribution, grow tax-free, and you can use them without taxation on qualified medical expenses
  • No Minimum Withdrawals - Unlike other retirement accounts, there are no required minimum distributions from HSAs, even after you retire. You can save the money until you need it for health care later in retirement
  • More Freedom - Employer-sponsored plans like 401(k)s require rollovers when switching jobs if the balance is below $5,000 but HSAs remain yours to keep regardless of career changes, even when an employer is contributing
  • Contributions Don’t Depend on Income - Contributions to some retirement accounts are dependent on income, but not HSAs. You can contribute the yearly maximum ($3,600 for individuals and $7,200 for families in 2021) regardless of how much you make. For those 55 years and older, the catch-up provision allows an additional $1,000 contribution. 

When Are HSAs the Right Choice?

A Health Savings Account can be a huge boost to your retirement savings, but it’s important to understand how it fits into your big-picture financial plan.

To be eligible for an HSA, you need to be on a high-deductible health plan (HDHP) and have no other health insurance. As of 2021, the deductible threshold is $1,400 for individuals and $2,800 for family-care plans. You must not yet be eligible for Medicare, and you cannot be claimed as a dependent on someone else's tax return. 

Many people shy away from HDHPs due to the risk and uncertainty of medical expenses. Out-of-pocket expenses can run as high as $7,000 per year for individuals or $14,000 for families. However, if you’re financially secure enough to afford the risk, the costs can balance out due to the lower monthly premiums. If you’re in good health and generally only need yearly checkups and routine care, your out-of-pocket spending will still be lower than what you would’ve spent on more robust insurance.

Conversely, HSAs and HDHPs may not be a good choice if you know you’ll have high medical expenses. People with chronic conditions, serious illnesses, or women planning to give birth are better off with lower-premium plans. Additionally, if you’re planning on having major surgery, the savings of a low-premium health plan outweigh the benefits of an HSA.

How to Maximize Your HSA in Retirement

When you reach retirement age, maximizing the value of your HSA will be important to both your long-term health care and overall financial health. There are a few critical steps to keep in mind for getting the most from your HSA:

  • You can only contribute to an HSA until you turn 65, so make sure to contribute as much as possible until then
  • Don’t just leave contributions sitting in your HSA like a traditional savings accountinvest the money into stocks or mutual funds, as you would an IRA or 401(k), to grow your account balance over time
  • Try to avoid using the funds until retirement so you can maximize the tax-free growth
  • HSAs cover many of the costs associated with Medicaremake sure you understand what qualifies as eligible tax-free spending

Health care costs are an inevitable part of long-term financial planning. If you play your cards right, HSAs can be a great way to cover the costs of your medical needs and reduce your tax burden in retirement. Most importantly, you’ll have peace of mind knowing you have a nest egg set aside specifically for any medical costs that may pop up over time.


If you want to learn more about planning for healthcare costs in retirement, Retirement Secrets will show you the path. Order the book now.

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