How to Use an HSA to Save for Retirement

Maryalene LaPonsie


Millions of Americans either have or are eligible for health savings accounts, but many fail to understand their benefits. Only a quarter of workers say funding their account is a financial priority, according to the 2018 Health Accounts Employee Attitudes Survey from Willis Towers Watson, a global advisory and solutions firm. By not contributing to their accounts, employees are missing out on immediate tax benefits as well as the opportunity to build additional savings for retirement.

"The HSA was created when high-deductible (insurance) plans came about," explains Joseph Conroy, author of "Decades & Decisions: Financial Planning at Any Age," and a financial advisor with advisory firm Synergy Financial Group in Towson, Maryland.

For 2019, individuals who have single health plans with a minimum deductible of $1,350 and a maximum out-of-pocket cost of $6,750 are eligible for an HSA. For those with family health plans, the minimum deductible for eligible policies is $2,700 and the maximum out-of-pocket costs are $13,500.

"The idea is it's a way to pay for health care and not be taxed on it," says Davey Quinn, senior vice president of investment management for United Income, an online financial planning firm.

Money deposited into an HSA is tax deductible. It then grows tax-free and can be withdrawn tax-free to pay for qualified medical expenses. "It's basically what I consider the holy grail of savings accounts," says Dan Mathews, a certified financial planner, CFP Board Ambassador and wealth manager with advisory firm Creative Planning Inc. in Kansas City, Missouri.

[Read: 2019 Tax Filing Tips for Retirees.]


To use your health savings investment account as a valuable retirement planning tool, follow these four steps:

-- Open an HSA investment account.

-- Contribute the maximum allowed.

-- Save your receipts and let your balance grow.

-- Use your HSA like an IRA in retirement.

Keep reading to see how to put each of these strategies into action.

Open a health savings investment account. Health savings accounts can be opened at many banks and credit unions, but these institutions may offer little to no interest. For instance, Bank of America currently pays between 0.10 to 0.45 percent interest on HSA accounts, depending on their balance. At Lake Michigan Credit Union in Michigan, HSAs earn 0.5 percent for balances lower than $5,000 and 1 percent for those at or above that amount.

Bank and credit union HSAs can be convenient for those who plan to spend their money right away on health care expenses. However, if you want to use your HSA for retirement planning, look for a provider who will allow you to invest your money for a greater return. Fidelity and Optum Bank are two such providers. But Quinn cautions that fees for some investment accounts can be high, so it's best to read all the fine print and shop around.

If you have a health savings account through your employer, payroll contributions may need to be made to the provider they select. However, there is nothing stopping you from later transferring balances to a different HSA.

[See: 10 Tax Breaks for People Over 50.]

Contribute the maximum allowed. In 2019, people will be able to contribute up to $3,500 to an HSA if they have a single health insurance policy or $7,000 if they have a family policy. Those who are age 55 or older are entitled to make an additional $1,000 in catch-up contributions.

"You don't have any of the limits you have with an IRA," Quinn says. While those with a workplace retirement plan such as a 401(k) can contribute to a traditional IRA, tax deductions may be limited for single taxpayers earning more than $64,000 per year or married couples filing jointly who earn more than $103,000. However, there are no such restrictions on HSA deductions. The entire contribution is deductible regardless of your income.

Save your receipts and let your balance grow. While HSAs are intended to provide a tax-free way to pay for health care costs, "you don't have to use it when you have medical expenses," Conroy says. Instead, you could pay bills out-of-pocket and let the balance in your HSA grow.

"You could reimburse yourself years later," Mathews says, though he cautions "you have to keep good records." He recommends keeping a file of paid medical bills that can be used for reimbursement in the future. For instance, this strategy could be used by those who want to retire early and need to supplement their income before Social Security payments begins. They can boost their bank account by reimbursing themselves for several years' worth of previous medical expenses so long as they have documentation to back up the claim should they be audited.

If you later change insurance and no longer have a qualified high-deductible plan, you can still pay for medical expenses out of your HSA. You just can't make any new contributions until you have a qualified plan again.

[Read: How to Save Your Tax Refund for Retirement.]

Use your HSA like an IRA in retirement. Workers who use money from an HSA for anything other than qualified health expenses will incur a 20 percent tax penalty. That's in addition to regular income tax that must be paid on the withdrawn amount.

There is no penalty for non-health care withdraws in retirement though. "It works just like an IRA once you hit (age) 65," Conroy says. At that point, money can be taken from an HSA for any purpose with only income tax due on that amount. That's the same as how withdrawals from traditional IRAs are handled after age 59 1/2.

In this way, contributing to an HSA essentially allows workers with IRAs to double their annual retirement savings. However, HSAs have one advantage. While traditional IRA holders are required to begin taking minimum distributions at age 70 1/2, there is no such requirement with an HSA.