The Truth About HSAs and Retirement

6Health Savings Accounts may be a smart way to supplement your retirement. But is it right for you?

The Truth about HSAs and Retirement

Health Savings Accounts (HSAs) are specifically designed to tax-efficiently pay off medical expenses. If used for qualified medical expenses, HSAs have a triple tax free benefit: pre-tax contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses.

Increasingly, people are using the tax advantages of an HSA to save towards retirement. For people who have already maxed out their 401(k) and IRA, contributing to an HSA may be a good way to supplement retirement savings. After age 65, HSA withdrawals used for non-medical expenses get taxed in a way similar to Traditional IRA withdrawals.

What is an HSA?

An HSA is a tax-exempt trust or custodial account an individual sets up with an HSA trustee to pay or reimburse certain medical expenses. The following are the amounts individuals can contribute to an HSA based on self-only coverage vs. family coverage.

HSA Contribution Limits

  Contribution Limits Catch-up Contribution Limits (for individuals 55 and above)
HSA 2021 2022 2021 2022
Self-only coverage $3,600 $3,650 $1,000 $1,000
Family coverage $7,200 $7,300 $1,000 $1,000


Catch-up Contribution Limits

If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. For example, if you have self-only coverage, you can contribute up to $4,600 for the 2021 tax year. For more information on catch-up contributions, please see the expanded IRS rules.

Am I Eligible For An HSA?

To be eligible for an HSA, you must:

Your employer may have information on HSA providers available to you. For more information on eligibility, please see the expanded IRS rules.

What Are The Benefits of An HSA?

The main perks of an HSA include the following:

  • You can claim tax deductions for contributions you make to your HSA.
  • Distributions may be tax free if the distributions are used for qualified medical expenses.
  • HSA assets may be eligible for investment. Interest and earnings within the HSA are tax free.
  • HSA assets can be rolled over year to year and remain in the account until you use them.
  • HSAs are not tied to a specific employer and will stay with you if you change employers or retire.
  • Some employers contribute to employee HSAs, and it may be excluded from your gross income.

In addition, individuals who only use HSA funds for qualified medical expenses receive a triple tax free benefit:

  1. Pre-tax contributions
  2. Tax-deferred growth
  3. Tax-free withdrawal (for qualified medical expenses)

Can I Use My HSA For Retirement?

Even though HSAs were originally designed to help individuals offset health care costs in a tax-efficient way, people are increasingly using the tax advantages of HSAs to save towards retirement.

The “sweet spot” age for HSAs, as it relates to retirement, is 65 or older. HSAs behave similarly to Traditional IRAs after the age of 65. If you still have an HSA balance after the age of 65, you can take withdrawals out of your HSA for non-medical expenses penalty free. Taxes may still be applicable to your withdrawal amounts, similar to Traditional IRA withdrawals, but you would avoid the 20% penalty from the IRS.

Note: Withdrawals for qualified medical expenses will still be eligible for tax free withdrawals and no penalty.

If you withdraw funds out of your HSA for non-medical expenses before the age of 65, taxes may be applicable to the withdrawn amount, in addition to a 20% penalty from the IRS. So, generally speaking, if you intend to use an HSA as a retirement income source, you would not want to pull money out of it until after you’re 65 years old.

To recap, there are three main outcomes when withdrawing funds from an HSA; it depends on how old you are and what you’re using the funds for:

  Qualified Medical Expenses Other Expenses
Less than 65 years old

Taxes are not applicable,

no penalty

Taxes are applicable, 20% penalty
65 years old or older Taxes are applicable, no penalty


4 Things To Consider When Using An HSA

Before attempting to take advantage of an HSA, there are a few things to look out for.

Know the fees.

HSAs aren’t subject to the same rules as employer-sponsored plans, like 401(k)s. This can cause less transparency in HSAs as it relates to fees and other costs. Sometimes employers will cover all, or a portion, of your fees as well. You’ll want to see the full fee schedule associated with your HSA before contributing.

Know the investment options.

Before contributing to an HSA, know what your investment options are and if there are any minimums. Some providers only allow for lower interest bearing investments, like money market funds, that generally are conservative but have low return, while other HSAs offer multiple mutual funds listings that may provide higher expected returns over time but likely with more exposure to risk. Additionally, many HSAs have minimums before you can start investing. For example, only once you have contributed $1,000 are you able to actually invest those contributions into mutual funds within the HSA.

Know the withdrawal rules.

Withdrawal rules around taxes and penalties can change with new regulations. It’s important to stay up-to-date with any new changes that take place.

Strategic Savings

Switching to a high-deductible health plan just to take advantage of an HSA for retirement purposes may not be the best course of action. In order to use an HSA to save for retirement, make sure that having a high-deductible health plan makes sense for you and your family before switching. If you do decide that a high-deductible health plan is right for you and your family, then an HSA may be a good way to supplement your retirement.

The Bottom Line

If you have money to invest for retirement and you’re deciding between an IRA, 401(k), or HSA, consider maxing out your IRA and 401(k) first. IRAs and 401(k)s are specifically designed for retirement and have many advantages that HSAs do not have. Afterward, if you find yourself with additional funds to invest, consider maxing out your HSA.