How To Use Your Health Savings Account (HSA) For Retirement

Once you turn 65, you can use them for anything you want—without incurring penalties.

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In 1 minute

Like IRAs and 401(k)s, health savings accounts provide tax benefits. Your contributions to an HSA are tax-free, and if you use this money to cover qualified medical costs, your withdrawals are tax-free, too. With the right HSA, you can even invest these funds and earn interest on your contributions.

Unfortunately, there’s a couple of catches. You can read more detail here, but the key highlights are below.

For starters, you’re only eligible to contribute to an HSA if you’re currently enrolled in a high deductible health plan (HDHP) and meet a few other conditions:

  • You are not enrolled in Medicare
  • You are not someone else’s dependent
  • You do not have other health coverage

And just as importantly, if you use HSA funds on unqualified expenses before you turn 65, there’s a steep 20% penalty.

Many people should expect to have more medical costs during retirement, and since withdrawals for qualified medical expenses are tax-free, it’s usually best to delay using your HSA until retirement. And since the penalty disappears after 65, HSAs can be a great tool to save for general retirement, too. Especially if you’re already maxing out your contributions to other retirement accounts!

If you’re thinking about switching health plans to open an HSA, make sure you consider whether an HDHP is right for you and your family. Your HSA won’t help you plan for retirement if you have to use it all on medical expenses each year. That’s why it’s usually smart to have a fully-funded emergency fund before or soon after signing up for an HDHP.

You’ll also want to choose an HSA with investment options that fit your goals. Decades away from retirement? An HSA that only lets you invest in short-term money market funds probably isn’t ideal.

As long as the health plan is a good fit and you find the right opportunity, an HSA can be a smart investment in your future.

In 5 minutes

In this guide, we’ll cover:

  • HSA eligibility
  • The benefits of HSAs
  • HSA withdrawal rules
  • Using an HSA for retirement

Health Savings Accounts (HSAs) are designed to cover future medical expenses. But that’s not the only way to use them. Thanks to their tax benefits and withdrawal rules, HSAs can make a valuable addition to your retirement plan.

As long as you’re eligible, you can make tax-deductible contributions to an HSA. The balance on this account rolls over every year, so there’s no pressure to “use it or lose it.” But you can’t just dump all your extra money into an HSA to avoid taxes, either. Your contribution limit depends on your age and who your health plan covers. If you’re 55 or over, you can make additional “catch-up” contributions. And if your family is covered by your health plan, it effectively doubles your limit.

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

Want to take advantage of an HSA? First you need to find out if you’re eligible.

Am I eligible for an HSA?

To be eligible for an HSA, you have to:

Your employer may have information on HSA providers available to you. The expanded IRS rules can provide more detailed eligibility information.

What are the benefits of an HSA?

Health Savings Accounts have a couple tax benefits that help you make the most of your assets. Your contributions are pre-tax, meaning you can deduct them from your income taxes. You can use these funds at any time to pay for qualified medical expenses without paying taxes or penalties. And when you turn 65, you can use your HSA for anything without incurring a penalty.

While you must have a high deductible health plan in order to contribute to your HSA, your HSA isn’t tied to a specific employer. It stays with you when you change jobs or retire. The money doesn’t leave the account until you use it. Also, your employer may contribute to your HSA—and since the contribution is pre-tax, it doesn’t count toward your gross income.

Some HSAs are specialized savings accounts. But some are actually investment accounts. Any interest and earnings that come from these HSAs are tax-free provided you don’t use them on unqualified expenses before you turn 65. So HSAs can rank amongst the best ways to save for retirement, on par with some 401(k)s and IRAs depending on factors such as an employer match, fees, and/or investment choices.

HSA withdrawal rules

Need some money to cover unexpected medical costs? Make a tax-free withdrawal. Don’t need it? Save it for your retirement. Withdrawing from an HSA for non-medical expenses comes with a 20% penalty . . . unless you’re over 65.

Once you turn 65, withdrawals from an HSA work a lot like withdrawals from a traditional IRA or 401(k). Your withdrawals count toward your annual income, so you’ll pay income taxes based on your tax bracket. However, if you use your withdrawal to pay for medical expenses, it’s still tax-free.

Basically, there are three possible outcomes when you withdraw from an HSA—and it all comes down to your age and what you use the money for.

Your age

Qualified Medical Expenses

Other Expenses

Less than 65 years old

No taxes, no penalty

Taxes are applicable, 20% penalty

65 years old or older

Taxes are applicable, no penalty

How to use your Health Savings Account for retirement

When you reach retirement age, medical bills can start to add up quickly. Use your HSA to cover these expenses, and you’re triple-dipping on the tax benefits! Your contributions are tax free, your interest and earnings are tax free, and so are your withdrawals. From a financial planning perspective, that’s hard to beat. And it can make expenses like long-term care a lot less frightening.

But an HSA is also a great supplement to your IRA or 401(k). Since the 20% penalty disappears when you turn 65, you won’t have to worry about whether an expense is qualified—just use your money as you see fit.

Before you choose an HSA ...

An HSA is like a financial Swiss Army Knife. But while it’s highly versatile, it’s not the right choice for everyone. So, before you switch health plans and open an HSA, there are a few things to consider.

Know the fees

When it comes to fees and other costs, HSAs are often less transparent than accounts like 401(k)s. Look at the full fee schedule for your HSA before contributing. Also, sometimes your employer will cover all, or a portion, of your fees—so find out about that, too.

Explore the investment options

Ideally, you want an HSA with investment options that fit your goals. Some providers only allow investments with low risk and low returns, like money market funds. Other HSAs offer multiple mutual fund listings with higher returns and more risk exposure. Some HSAs have minimums before you can start investing. For example, you might only be able to invest your money once you’ve contributed $1,000 to the HSA.

Stay current on withdrawal rules

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

Don’t just switch to an HDHP

A high-deductible health plan isn’t right for everyone. Before switching to an HDHP so you can use an HSA to save for retirement, make sure that works for you and your family. A high-deductible health plan brings with it the potential for higher out-of-pocket medical costs.

Start planning for retirement

A health savings account is ideal for covering medical expenses. But that’s not all it’s good for. If an HSA makes sense for you, it can make a great addition to your retirement plan.