Health Savings Accounts (HSAs) were designed to help employees with a high-deductible health plan put money away before taxes for qualified health expenses. But what many people don’t know is that HSAs can also be an excellent retirement savings tool. You can use the money you save and invest in an HSA to add to what you’re already (hopefully) putting into a 401(k) or individual retirement account (IRA).
Understanding how to use your HSA effectively as a retirement savings tool is key to maximizing its benefits. Here’s what you need to know:
HSAs Don’t Expire When You Retire
Unlike Flexible Spending Accounts (FSAs), your HSA is not a “use it or lose it” plan. The money you contribute rolls over year to year and remains yours even after you leave your job or retire. Think of an HSA as a retirement savings tool dedicated to medical expenses.
You Can No Longer Contribute After Enrolling in Medicare
You can only contribute to an HSA while you’re enrolled in a high-deductible health plan (HDHP). Once you sign up for Medicare — usually at age 65 — you can no longer add money to your HSA. However, any funds already in the account can still be used.
Tip: If you’re still working past 65 and have an HDHP, you may delay enrolling in Medicare to continue HSA contributions — but be cautious and consult a financial advisor first.
Withdrawals Are Still Tax-Free for Qualified Expenses
The biggest advantage of using an HSA as a retirement savings tool is that withdrawals for qualified medical expenses remain tax-free. According to Principal, a global financial group, these include:
- IRS-qualified health care premiums for Medicare Parts B, C, and D (excluding Medigap)
- Medicare deductibles, copays and co-insurance
- Qualified long-term care services
- Prescription drugs
- Dental and vision expenses
- Hearing aids
- Some over-the-counter medications, medical equipment and supplies
You’ll need to keep receipts in case you’re ever asked to prove that the withdrawal was for a qualified expense.
Tip: You may have a debit card that’s tied to your HSA to pay for expenses. While this makes using your HSA marginally easier, you’ll have to pay fees when you use the card, and you will still need to submit receipts for qualified expenses. Sri Reddy, senior vice president of Retirement and Income Solutions at Principal, advises people to consider ″paying for the health care expenses with something like a rewards credit card, then reimburse yourself after you submit receipts” to maximize your benefits.
You Can Use HSA Funds for Non-Medical Expenses — With a Catch
Fidelity Investments considers an HSA one of the most tax-efficient savings options available, as it offers triple tax savings: You can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses. This flexibility makes your HSA a potential backup retirement account, though you’ll get the most value by using it for health care costs, according to Morningstar Investments.
Once you turn 65, you can withdraw HSA funds for any reason without facing the 20% penalty that applies to those under 65. However, if the money isn’t used for qualified medical expenses, it will be taxed as regular income — similar to a traditional IRA withdrawal.
It Can Help You Manage Taxes in Retirement
Strategic use of your HSA can help you control your taxable income. For instance, instead of pulling from a traditional IRA or 401(k), you can use HSA funds for medical bills to avoid increasing your taxable income. This may help keep you in a lower tax bracket and reduce Medicare premium surcharges.
HSAs and Your Estate Planning
If you name your spouse as your HSA beneficiary, they can treat the account as their own. But if someone else inherits the account, it’s treated as a taxable distribution — meaning the entire value of the account becomes taxable to the beneficiary in the year it’s inherited.
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