Using a Health Savings Account at Retirement


Most people use health savings accounts (HSAs) to help cover high healthcare costs. However, did you know these accounts can also be used for retirement savings? Let’s review what HSAs are and their unique benefits to retired individuals.

What Is a Health Savings Account?

An HSA is a savings account designed for people with a high-deductible health plan (HDHP) and no other health insurance. HDHPs come with low monthly premiums and high deductibles, meaning users must pay substantial out-of-pocket costs when they need medical care. With an HSA, these individuals can set aside untaxed dollars to cover qualified medical expenses (including deductibles, what would normally be covered under co-payments, and coinsurance).

What Are the Benefits of an HSA?

By allowing people to use their pre-tax income, HSAs can help decrease total healthcare costs. These tax-efficient benefits also prove helpful when it comes to retirement. Here are a few advantages of HSAs that you can leverage to boost your retirement savings:

  • Income tax-free withdrawals for qualified medical costs
  • Income tax-free contributions
  • Income tax-free interest and investment growth

In a 401k, you typically have to pay taxes on any withdrawals. HSAs, on the other hand, let you make income tax-free withdrawals, provided it’s for a qualified medical expense — if the withdrawal is not for healthcare costs, you’ll face a 20% penalty pre-retirement. Users also don’t have to pay taxes on contributions, interest, or investment growth.  

Over time, the tax savings can add up. For example, if you contribute around $3,000 a year, you’ll have approximately $1,000 in tax savings; over ten years, you’ll get $10,000 in tax savings. Keep in mind there is a limit to how much you can contribute — individuals may save up to $3,850 annually in 2023, while families can contribute up to $7,750. These amounts generally increase by about $100 annually for individuals and $200 per year per family. These amounts are updated each year by the IRS.

How Does an HSA Work In Retirement?

Now that you know the benefits of saving money through an HSA, you might wonder how this account works during retirement. Once you retire, the rules surrounding HSAs get laxer, and the account functions more like a 401k. Here are a few fundamental changes that occur:

  • Catch-up contributions
  • Penalty-free withdrawals
  • No minimum distributions
  • Medicare restrictions

First, those over the age of 55 are eligible for catch-up contributions. You can add an extra $1,000 to your HSA every year after your 55th birthday.

Once you turn 65, you qualify for penalty-free withdrawals. In other words, you can use your HSA savings for nonmedical related expenses without paying the 20% tax penalty. However, you will still need to pay regular income tax for these withdrawals.

Another unique feature of HSAs is that they don’t have minimum distributions. With a 401k or traditional IRA, you must make minimum annual withdrawals when you turn 72. HSAs, meanwhile, let you keep money in your account.

Finally, you can continue contributing to your HSA during retirement — with one exception. If you enroll in Medicare (which becomes available at age 65), you may no longer deposit funds into your account. However, you can use your savings to cover Medicare premiums and out-of-pocket medical expenses.

Ultimately, the triple-tax advantage makes HSAs an excellent tool for retirement savings. You can save extra money over time, but once you hit retirement age, you’ll enjoy more lenient rules. 

If you want to learn more, don’t hesitate to contact our team today. We’re happy to walk you through your plan, answer questions and show you how to leverage an HSA to your advantage.

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