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Key points

  • A health savings account has a triple tax advantage.
  • After reaching age 65, you can make penalty-free HSA withdrawals for any purpose.
  • Nonqualified distributions after you reach age 65 will be taxed at ordinary income rates.

A health savings account can be an excellent way to pay for out-of-pocket medical expenses. Anyone with a high-deductible health plan can contribute to a tax-advantaged HSA.

But the benefits extend beyond paying for medical care with tax-free dollars. An HSA can also be a powerful retirement savings tool. The funds can be used for any purpose without penalty after age 65.

Using your HSA to save for retirement takes forethought. You must weigh the benefits of using the money for retirement versus paying for medical expenses now.

What is an HSA?

An HSA helps you save money to pay for medical expenses. It’s available only to people with high-deductible health plans. High deductibles can mean higher out-of-pocket costs. HSAs give those people a way to supercharge their savings for medical expenses.

You can take a tax deduction for your annual HSA contributions when you file your income taxes. This reduces your taxable income that year. If you have an employer-based HSA, your employer may offer pretax contributions. That means contribution amounts are pretax and reduce your gross income.

You won’t owe taxes if you use the money to pay for qualified medical expenses. It amounts to the IRS giving you a rare free pass on part of your income. But an HSA is available only if you have an HDHP. That means a deductible of $1,600 or more for individuals and $3,200 or more for families in 2024. 

Benefits of an HSA

An HSA is a powerful savings tool, primarily because of its tax benefits.

“Health savings accounts are a triple threat when it comes to taxes,” said James Allen, a certified financial planner, a certified public accountant and the founder of personal finance site Billpin. “The money you put into an HSA isn’t taxed, any growth and earnings are tax-free, and you don’t pay taxes when using the funds for medical expenses.”

An HSA becomes even more beneficial when you consider the tax rules for seniors. Before age 65, you can use the money in your HSA for qualified medical expenses only. Use it for anything else, and you’ll pay income tax and a 20% penalty.

You can use the money in your HSA for any purpose once you reach age 65. You’ll still pay income tax for anything other than qualified medical expenses. But you won’t pay the added penalty.

Why use an HSA for retirement?

You may wonder why you’d save for retirement with an HSA. What if you use those funds to pay for medical expenses today and contribute to a separate retirement account?

“According to the Employee Benefits Research Institute, a 65-year-old couple on average will need $318,000 saved to have a 90% chance of covering their health care costs in retirement,” said Kendra Smith, senior director of health savings at TIAA. “That’s a significant amount of money to have set aside for health care expenses alone.”

You can use your traditional retirement savings to pay for medical expenses during old age. But an HSA has the added benefit of allowing you to avoid taxes on withdrawals. Any money you spend on qualified medical expenses is untaxed.

“In most cases — unless you made Roth contributions during your career — the distributions from your retirement assets will be taxable at the federal level, including those used for medical expenses,” Smith said.

How to maximize your HSA benefits

Are you weighing whether to spend your HSA on health expenses today or save it for retirement? Consider which route helps you maximize the tax advantages. Using the account today for medical expenses allows you to benefit from the upfront tax savings. But you won’t get tax-free investment growth like if you saved the money for retirement.

You might have access to both an HDHP and a low-deductible health plan through your employer. Do the math to determine which option is best for you. An HSA is a powerful tool. But a lower deductible will be better for some.

How to save for retirement with your HSA

To use your HSA to save for retirement, treat it like you would any other retirement account.

Contributions to an employer-based HSA can be taken out of your paycheck. If you use a third party, you can set up an automatic monthly contribution. You can claim the tax deduction when you file your income tax return in the spring.

An added bonus: Your employer may also contribute to your HSA.

“Do keep in mind if your employer makes an HSA contribution on your behalf, it counts toward the annual IRS stated limits,” Smith said. “Some employers will make additional contributions to your HSA if you complete health and wellness-related activities, such as getting a biometric screening or participating in smoking cessation or weight loss programs.”

Investing in your HSA

The next step is investing the money in your account. Your investment options depend on your HSA provider. You may be able to choose from mutual funds, exchange-traded funds and individual stocks.

Not all HSAs offer investments. Some accounts, such as those at banks, may pay some interest but don’t let you invest. You may need an account through a brokerage firm or a specialized HSA. 

Consider when you expect to tap into the account. Some people like to keep a portion of their money in low-risk, capital preservation investments. This should ensure cash is available for upcoming medical expenses. They can then invest the rest in riskier growth funds with the potential for greater returns. A financial planner can help you determine the right mix of funds for your situation.

Compounding gains should help your contributions grow. The dollars in your account could increase to several times their original value by retirement.

How to use your HSA in retirement

During retirement, you can make tax-free withdrawals from your HSA to pay for qualified medical expenses. These include medical bills and other health care-related costs. 

Qualified medical expenses offer the greatest tax advantage. You’ll have to pay income taxes on withdrawals used for other purposes. So save receipts for any medical expenses paid out of pocket during your working years. You can reimburse yourself tax-free in retirement for expenses incurred after your HSA is established. 

Flexibility is a major benefit of using an HSA for retirement. If you need to dip into your funds to pay for nonqualified expenses, you can. Your HSA won’t incur any more tax liability than a traditional individual retirement account or 401(k).

How to maximize your HSA contributions

Your HSA limits how much you can contribute each year. In 2024, you can contribute:

  • $4,150 for self-only coverage.
  • $8,300 for family coverage.

You can contribute another $1,000 per year as a catch-up contribution if you’re 55 or older. 

HSA contribution limits are periodically increased to keep pace with inflation.

The earlier you start contributing, the better, as it means more years to generate returns. Maxing out your contributions takes discipline but can make a huge difference in the future.

Frequently asked questions (FAQs)

Yes, you can use an HSA for retirement. The HSA rules relax once you reach age 65. 

At that point, you can continue using your HSA for qualified medical expenses tax-free. And you can use it for any purpose without paying the 20% penalty. Nonqualified expenses will still be subject to income taxes.

Your HSA functions much like a traditional retirement account when you turn 65. You can make withdrawals for any reason without penalty. You’ll owe only income taxes on those withdrawals. Withdrawals for qualified medical expenses won’t incur taxes or penalties.

Everyone’s finances are different. Whether you should max out your HSA depends on your financial situation. But given the triple tax benefit of an HSA, it often makes sense. You might even opt to max out your HSA before your IRA or 401(k). A financial advisor can help you decide what makes sense.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Erin Gobler

BLUEPRINT

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Her passion for teaching others about personal finance came from her own experience of learning to manage her money in a better way. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Chris B. Murphy is a freelance editor of investing content at USA Today Blueprint. He was most recently an editor and fact-checker for Investopedia.com and The Balance but also has 17 years of experience in financial services. Chris specializes in financial topics, including investing, personal finance and economics. He holds a bachelor's degree in economics with a concentration in finance.

Hannah Alberstadt is the deputy editor of investing and retirement at 91Ӱ Blueprint. She was most recently a copy editor at The Hill and previously worked in the online legal and financial content spaces, including at Student Loan Hero and LendingTree. She holds bachelor's and master's degrees in English literature, as well as a J.D. Hannah devotes most of her free time to cat rescue.