Are You Taking Full Advantage of an HSA as a Retirement Saving Tool?

Health savings accounts are prized by many for their short-term benefits. HSA contributions are tax-deductible, lowering your tax bill every year that you add to the account, and you can pull money out of your HSA tax-free for qualified medical expenses right now, or next month, or whenever you need it. But when used properly, an HSA can also be an instrumental tool for long-term financial planning that sets you up for a comfortable and satisfying retirement. 

These accounts offer a range of tax-advantaged benefits that can help you grow your wealth and afford the medical care you need in retirement. If you’re not already using an HSA to maximize your retirement savings, it might be time to reconsider.

HSAs: Potential Benefits for Retirement

Your insurance advisors and retirement advisors are the best resource for determining if and how an HSA fits into your plans, including giving you specific guidance about how the following benefits might affect your retirement saving strategy. 

• Portability makes an HSA a viable retirement saving tool no matter where you are in your career. HSAs aren’t linked to employment status, so as long as you’re enrolled in an HSA-qualified high deductible health plan, you can open an HSA at any time. If you’re early in your career, you could change jobs a dozen times before reaching retirement without losing your HSA (however, you can only contribute funds while enrolled in a high-deductible plan). 
• An HSA can be part of your strategy to maximize contributions to retirement accounts. If you’re aggressively saving for retirement and routinely max out your annual contributions to your 401(k) and IRA, an HSA gives you another tax-advantaged place to save. You’ll still be limited by the annual HSA contribution limit, which increases by $1,000 once you turn 55. (For example, in 2023 you could contribute up to $7,750 to your HSA if your health plan covers you and your family, or up to $8,750 if you’re also 55+.) 
• IRAs may be rolled into HSAs for greater tax savings. The tax benefits make HSAs an especially attractive savings vehicle for anyone who expects to live on a fixed income in retirement. Not only are contributions made pre-tax, but money grows tax-free and you won’t be taxed on any withdrawals that are used to pay for qualified medical expenses. And unlike IRAs and other retirement accounts, HSAs don’t require you to take annual distributions when you reach a certain age. 

Because of these benefits, some people elect to roll an IRA into an HSA. Money that would be taxed as a withdrawal from your IRA then becomes money that you can take out tax-free for qualified expenses. (Note that there are eligibility requirements and some strategy involved in making this work, and the rollover amount is limited to your maximum HSA contribution amount.)

• Investing HSA funds creates an opportunity to speed up the growth of your retirement savings. If you have the means to cover your medical expenses without having to pull much money from your HSA, that money can grow tax-free in investments for many years. Your options for investing your HSA funds depend on how and where the account is set up. HSA administrators may create recommendations so account owners don’t have to make investment decisions. Or, you may be able to create and adjust your own HSA investment portfolio to reflect your personal investment philosophy. (Speak to your investment advisors before making these decisions.)
• In retirement, your HSA can pay for Medicare premiums as well as other medical and non-medical expenses. Building up a significant balance in your HSA before 65 can help you cover a broad range of necessary expenses in retirement, including Medicare premiums. As you age, it’s likely that your medical expenses will increase. Having a fund earmarked for those additional costs helps you pay for the care you need so you can hold off on dipping into your retirement accounts and other savings for as long as possible. HSA funds can also be used for non-medical expenses after age 65, though you’ll pay a penalty for these withdrawals. 
• Money left in an HSA can be passed to heirs outside of probate.  Don’t forget to consider how an HSA can support your overall estate planning strategy. Any money left in your HSA at your death can be transferred to a beneficiary of your choosing. If you name a spouse as the sole beneficiary, your HSA essentially becomes their HSA. They can enjoy all the same tax benefits you did as the original owner. However, a non-spouse beneficiary will receive a lump sum payout from the account and must pay income taxes on the full amount in the year they inherit. Or, you may name a favorite charity as the beneficiary for any unused HSA funds at your death.

Are There Drawbacks to HSAs? 

Because an HSA can only be paired with a high deductible health plan, they’re not an ideal or even viable option for everyone. People with health conditions that require ongoing medical treatment may spend less money overall by utilizing low deductible health plans, for example. 

HSA planning and Medicare planning should also be coordinated because HSA contributions must end when you first enroll in Medicare. This rule can make things especially complicated for people who work past 65. You may be able to delay Medicare Part B enrollment without penalty as long as you’re covered by an employer’s health plan, but because most people don’t pay for Medicare Part A it often makes sense to enroll in Part A as soon as you can. However, enrolling in Part A at 65 will end your HSA contributions. If you want to continue contributing to your HSA past age 65, make sure to speak to your insurance advisors about how Medicare fits into your plans.

Are You Maximizing the Retirement Benefits of an HSA? 

With help from Sachetta, LLC’s financial advisors, you don’t have to make decisions about HSAs alone. We’re here to give our clients a full picture of their options and provide the guidance they need to identify the insurance and retirement planning strategies that serve their needs—both right now, and down the road in retirement. If you have any questions about utilizing an HSA as a retirement planning tool, contact us today.

Michael J Callahan, CPA, CFP®, MST has been involved in personal financial planning, as well as both business and individual taxation for more than 15 years. Our ideas about money are formed by our life experiences. Over the years, Mike has seen those close to him make common money mistakes from not having enough life insurance, to not doing the proper estate planning. When he received an inheritance in college and started looking into how he could use it to achieve his goals, he realized that he could use those experiences to help others. He changed his major to Finance, and the rest is history.