Investing for the Future: How to Use Your Health Savings Account (HSA) to Save for Retirement

Before we jump into using your HSA as a tool for retirement, let’s cover the basics of what a health savings account is.

Who qualifies for a Health Savings Account (HSA)?

Unfortunately, HSAs aren’t available to everyone. You must have a high-deductible health plan (HDHP) to qualify.

In 2023, the IRS defines high deductibles as at least:

• $1,500 for individuals
• $3,000 for family coverage

There are additional restrictions: you cannot be on Medicare or claimed as a dependent on someone else’s tax return.

Funds from your HSA don’t just cover you. You can also use money from your HSA to pay for medical expenses of a spouse or any children you claim as dependents.

What are the tax advantages of an HSA investment account?

With an HSA, you can enjoy triple tax advantages:

• You are not taxed on your contributions.
• If you use a portion of your HSA balance to invest, you’re not taxed on earnings.
• When you withdraw money to pay for qualified medical expenses, you are not taxed on those distributions.

Plus, when you contribute to your HSA, that lowers your taxable income for the year.

There are, however, annual contribution limits.

In 2023, contribution limits are:

• $3,850 for individuals
• $7,750 for families

Can you use HSA funds for nonqualified expenses?

Yes — but you’ll be penalized.

Not only will you be charged income tax on your withdrawal, you’ll also face an additional 20% bonus penalty. That’s a big chunk of change, which is why it’s wise to only withdraw for non-medical expenses only in case of an emergency, when no better options are available.

However, once you reach 65 years old, you’re free from the bonus penalty. So while the withdrawal will still be treated — and taxed accordingly — as regular income, you won’t have to pay the additional 20% penalty. In this way, your HSA can also be considered a tool for retirement, just like a 401(k) or IRA.

How long can you contribute to your HSA?

You can contribute to your HSA indefinitely, as long as you continue to be covered by an HDHP. However, once you turn 65 years old, you may wish to enroll in Medicare. Once you do that, you will no longer be able to contribute to your HSA. However, you can still withdraw funds tax-free from your account for qualified medical expenses.

Or — as we mentioned above — you can treat the account as an additional retirement fund; money withdrawn after 65 years old for non-medical purposes is taxed only as regular wages.

3 Ways to Use Your HSA for Retirement Planning

Grow your HSA by investing your funds.

Contributions alone aren’t the only way to grow your HSA.

You can also invest your HSA funds. You aren’t taxed on growth from investments, giving your money greater opportunities for accumulation. Most HSA providers require account minimums before you can invest; these minimums cannot be higher than $2,000.

Use your HSA for future medical expenses.

Unlike retirement accounts, you don’t have to start withdrawing money once you reach a certain age.

That means you can use your HSA specifically to plan for medical expenses in retirement. This could be a good option if you have the financial means to pay for medical expenses during your working years, while letting the HSA grow untouched.

Reimburse yourself for medical expenses in a later year.

Here’s another great feature of HSAs: you don’t have to reimburse yourself for medical expenses that occur in that year.

For example, let’s say that in 2023, you are billed for a colonoscopy. You decide to pay for that bill out of pocket, instead of withdrawing the funds from your HSA. In 2028, you then decide that you’d like to reimburse yourself for that bill. As long as you keep your medical receipt(s), you can reimburse yourself tax-free for that colonoscopy bill, putting extra money in your pocket.