4 Reasons to Use an HSA to Save for Retirement & How to Optimize

By Chika


Last Updated: November 11, 2022



You likely qualify for tax-free health savings account if you have a health insurance policy with a high deductible.

However, did you know that HSAs can be utilized for purposes other than out-of-pocket medical costs?

When it comes to increasing your retirement funds, an HSA can be a good option, especially if you're young, healthy, and don't go to the doctor often. Aside from standard retirement plans like an IRA and a 401(k), HSAs offer another way to accumulate tax-advantaged funds for retirement.

Here is a look at what HSA accounts are and how to make the best use of them, other than out-of-pocket medical costs



What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account designed for individuals who have high-deductible health plans (HDHPs) to pay for out-of-pocket medical expenses. An HDHP as defined by the IRS is any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.

HSAs have been available since 2004, and are made available by about one in five employers who offer health benefits. To be eligible for an HSA, you need to be 18 years of age or older and be covered under a qualified HDHP (or a health plan not under a qualified HDHP) on the first day of a certain month. However, many eligible Americans have failed to take advantage of them.

Eligible individuals can save up to $3,550 a year, while families can save up to $7,100 for families pre-tax (these figures are based on the 2020 tax year). If you are 55 years or older at the end of the tax year, you can contribute an additional $1,000.

Your employer can also make a matching contribution to your HSA, though contributions (yours and your employers) are capped annually. Unlike flexible spending accounts (FSA), where the money must be used before the end of the year, money in your HSA account can be accessed anytime.

Additionally, you can take money out of your HSA to cover qualified medical and dental costs, such as copays for office visits, diagnostic tests, supplies, equipment, over-the-counter drugs, and period care items.

However, if you withdraw from your HSA before the age of 65, to pay for non-medical expenses, this would attract a 20% penalty. Withdrawals after the age of 65 do not attract penalties but are subject to income tax. 



4 Reasons to Use an HSA for Retirement

Although they weren't made especially to be used in retirement planning, an HSA can be utilized for retirement as a supplement to other sources of income or assets. Several benefits come with using an HSA alongside a 401(k), Individual Retirement Account, and other retirement savings vehicles. 

Using an HSA for retirement could make sense if you’ve maxed out contributions to other retirement plans and you’re also investing money in a taxable brokerage account. An HSA can help create a well-rounded, diversified portfolio for building wealth over the long term.

Here’s a closer look at the top four reasons to consider using HSA for retirement.


1. Lowers Your Taxable Income.

Contributions to an HSA  are pre-tax, which ultimately lowers your taxable income. Furthermore, employer contributions are excluded from your gross income.

Also, withdrawals are tax-free, provided funds are used for qualified medical expenses. This contrasts with other retirement accounts such as a Roth IRA or 401(k) where contributions and withdrawals are taxed.


2. Earn Interest on Contributions.

Similar to a regular savings account, HSAs pay interest.

But interest earned on an HSA is not taxed, unlike interest earned on a conventional savings account. To optimize HSA earning potential, money can be invested in mutual funds once an account reaches a predetermined balance threshold.

This will help you save more for retirement because any interest, dividends, or capital gains you receive from an HSA are tax-free. Plus, there are no mandated minimum distributions from an HSA account in retirement; you may only withdraw money when you need it or want to.


3. No use it or lose it.

There is no "use it or lose it" clause with an HSA, unlike Flexible Spending Accounts, which let people save pre-tax money for medical expenses but require them to spend it within the same calendar year.

The monies in your HSA will be accessible the following year if you don't use them this year. The funds can be used whenever you want.


4. Extra Money for Health Care After Retirement.

Even though Americans can sign up for Medicare at age 65, the majority of long-term chronic healthcare requirements and treatments are not covered by Medicare.

As long as the money is allowed to accumulate, having an HSA can be a smart way to save money to cover those unforeseen out-of-pocket medical bills.



How to Optimize Your HSA for Retirement

An HSA shouldn't be viewed as a savings account. It is also an opportunity to invest your contributions and grow your portfolio over time.

Funds from HSA can be invested in risk-averse assets like index funds, mutual funds, and ETFs. If you are younger you can add stocks to your HSA investment portfolio mix. The key is diversifying your portfolio - this would hedge risks from market volatility and drawdowns.



What are the Costs of Operating an HSA?

If you choose to start a healthcare savings account, don't be shocked if there are fees associated with doing so.

If a professional is giving you investing advice, some of these accounts may charge you a monthly fee to keep the account open. These costs could be more, but they could also be as low as $3 or $5 per month. 

Additionally, you can be charged a fee that rises in proportion to the worth of your account. However, some HSAs have no costs. These typically require more active management by the account holder as opposed to using financial professionals.

To ensure that you are aware of the guidelines, it is crucial to read the small print of any account agreement.



Things to Consider When Choosing an HSA

If your employer provides a health savings account, this suggests they have already done the research. However, you would have to carry out your own research. There is an array of Health Savings Plans to choose from.

If you are unsure of how to go about this, you can use HSA comparison websites to help navigate the search and make the best choice. 

When choosing an HSA, it is important to pay attention to any monthly/annual fees so you know exactly what to expect. Ideally, you should go for an HSA that makes it easy to manage your account online. Many banks and credit unions offer HSAs, so you can check with your financial institution.



The Takeaway

Your existing budget may benefit greatly from a health savings account, which can be used to pay for tax-free out-of-pocket medical expenses. However, it can also be used to build up tax-free savings (and interest) for future use on both medical and non-medical bills.

However, using an HSA to save for retirement only makes sense if you're taking care of your health. It is not advisable to prioritize saving HSA funds over your health. If you can save your pre-tax HSA funds for later and use post-tax funds for your current medical expenses, you may be able to amass a sizable retirement fund.

Examine whether a high-deductible health plan might be a good fit for you the next time you're selecting a health insurance strategy. Open an HSA as soon as you're qualified and begin making contributions.

You can significantly increase the value of your other retirement options by increasing your contributions, investing them, and holding onto the remaining funds until retirement.

Photo by Karolina Grabowska



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