Using A Health Savings Account As A Retirement Vehicle

You may not realize this, but a health savings account (HSA) can be used as a retirement vehicle. If you've maxed out your 401(k) and IRA contributions, maxing out an HSA could be another source of retirement funds.

A health savings account offers triple tax savings because you contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses.

Given the vast majority of us will incur qualified medical expenses as we age, contributing to an HSA to address these expenses is a good idea. We save for retirement to pay for retirement, and one of retirement's largest expenses are health-related.

You can use your HSA to pay for eligible health care, dental, and vision expenses for yourself, your spouse, or eligible dependents (children, siblings, parents, and others who are considered an exemption under Section 152 of the tax code). Qualified medical expenses encompass almost everything you can think of as well.

You can even use the HSA money for nonmedical expenses after age 65, such as buying a Lamborghini. However, be aware this expense will be adjudicated as nonmedical and taxed as ordinary income. Further, be aware if you are under age 65, there is a 20% penalty on nonmedical withdrawals in addition to the tax.

Finally, an HSA is also double-FAFSA blind when applying for college financial aid. YIn other words, the FAFSA application doesn't recognize the HSA as an asset. As a result, the FAFSA thinks families are poorer than they really area.ou can use the HSA to game the college financial aid system to get more free money.

Invest As Tax-Efficiently As Possible

The more money we can invest in a tax-efficient manner to pay for upcoming expenses, the more money we will likely end up having. After all, taxes will likely be our largest ongoing liability.

For retirement expenses, we invest in retirement vehicles like the 401(k), 403(b), Solo 401(k), Roth IRA, IRA, and SEP IRA. For our children's education expenses, we invest in a 529 plan. Therefore, investing in an HSA for medical expenses is also a rational decision.

The thing is, not everyone is eligible for a health savings account.

How To Be Eligible For A Health Savings Account

In order to be eligible for a health savings account, you need a high deductible health plan (HDHP). The HDHP from work or in the private marketplace must have a deductible of at least $1,350 for individuals and $2,700 for family coverage.

The people who usually get a high deductible health plan are those who want to save money on monthly health insurance premiums. For those of you who are younger, healthier, and don't expect to need medical services, getting an HDHP may be a good way to save.

By using money from your health savings account, you'll be able to cover the cost of your deductible in a tax-efficient manner, if these costs and more were to arise.

For those of you who are older, less healthy, and have many dependents, getting a high deductible health plan to qualify for a health savings account may not be the optimal move.

Your chances of paying for your entire high deductible and more are higher. Further, you may face healthcare service limitations such as not being able to get the quality or type of care you need in extenuating circumstances.

Maximum Contribution Limit To A HSA

The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. This is up from $3,650 and $7,300 in 2022.

For those 55 and up, there is a catch-up contribution of $1,000 more per year. Hence, a family can contribute $8,750 to an HSA in 2023. The HSA contribution limits should keep going up each year due to inflation.

Using an HSA as a retirement vehicle works if you can accumulate a lot of money in your HSA while still working. The only way to do that is to contribute the maximum each year, invest it wisely, and then use as little of the HSA money as possible.

To preserve your HSA balance, you could pay for any qualified medical expenses with non-HSA money. However, it's generally better to use your HSA money when you are paying a higher marginal income tax rate.

HSA For Retirement Healthcare Expenses

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement. Some estimates are for more than $400,000.

If you use a 6% compound growth percentage, $300,000 will turn into $537,000 in 10 years and $962,000 in 20 years. Therefore, it's good to do what you can to save for retirement healthcare expenses. I have no doubt healthcare costs will continue to rise by at least 5% a year, forever.

Due to my belief that healthcare companies will continue to profit handsomely off us, one of my hedges is to invest in my healthcare provider, such as UnitedHealth Group (UNH). You may want to consider doing the same.

If you can't beat them, you might as well join them. It's the similar idea of investing in institutional real estate companies and buying stock of companies that reject you.

In America, there really is no beating the rising cost of healthcare. As a nation, we are gradually getting less healthy. Only if we suddenly had to move our bodies for a living and if food companies are no longer allowed to produce sugary processed foods, maybe we'd have a chance.

Inflation chart by category - Using an HSA to pay for rising health care expenses

A $1 Million HSA Balance Is Possible

One of the reasons why I didn't invest in a Roth IRA while I was younger was because the contribution limit was so low. Not investing in a Roth IRA is one of my regrets today.

You might feel HSA contribution limits are too low to bother having one as well. However, a $3,650 tax-free contribution limit per year per person in 2022 is nothing to sneeze home and get sick about.

Below is a chart that shows a family contributing the maximum annual HSA over a 30-year period. Remember, a family can now contribute a maximum of $7,300 a year. If the family never touches the HSA, and the balance grows by an average of 8.6% a year for 30 years, the balance will grow to $1 million.

The HSA cash balance of $322,000 assumes a 2.4% annual rate of return, which is unlikely due to our current low interest rate environment. But even with 0% growth, 30 years of contributing $7,300 a year equals $219,000 tax-free.

If you have to pay a 20% long-term capital gains tax in retirement, then $1 million in an HSA equals $1,250,000 in pre-tax gains. In other words, you don't need to save as much for medical expenses with an HSA.

How An HSA Works For Estate Planning

There is also a possibility you could pass on your HSA to your heirs. This situation may arise if your medical expenses are much lower or you die younger than expected. There is also no required minimum distribution for HSAs.

In such a scenario, three things can happen:

1) Your spouse inherits the HSA after your death with the same triple-tax-free treatment.

2) Someone else other than your spouse inherits your HSA because you're single or don't like your spouse. In such a scenario, the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.

3) Finally, your estate is the beneficiary. The fair market value of the HSA is included on your final income tax return.

Ideally, you die before your spouse and s/he inherits your HSA. This way, your spouse won't have any tax consequences. Further, outliving your spouse creates a lot more heartache.

If you don't have a spouse and want to save on taxes, name your estate or beneficiary, whichever party is in the lowest tax bracket. Of course, you ultimately want to name a beneficiary you care about the most.

Please consult an estate planning lawyer for more clarification and details. If you haven't set up a revocable living trust, a will, and/or a death file, please do so ASAP. I promise you will feel so much relief once you do.

Wealthier People Don't Have HSAs

Although I just got done discussing the benefits of a health savings account as a retirement vehicle, perhaps getting an HSA isn't the best move.

There is not one rich person I know ($10+ million net worth) who has an HSA. The reason why is because no rich person I know is willing to get a high deductible health plan.

Instead of having an HDHP, rich people either get Platinum plans with low deductibles or Medical Concierge Service on top of their Platinum plans. Their main concern is having the highest quality care and access possible. When it comes to health, rich people are less willing to gamble for the sake of saving money.

There is a fear by rich people that an HDHP will be too limiting when healthcare is needed the most. There are too many horror stories of denial of service or outrageous costs in the healthcare world. The hope is that by having a better plan, these issues will decrease.

When we are sick, we often are willing to spend a lot more money to get treated or at least get answers.

Medical Concierge Service As You Grow Wealthier And Older

For an extra annual fee, you can get Medical Concierge Service where your primary care provider will give you special access. This is the exact opposite of getting a HDHP.

You may get the doctor's private number and e-mail to contact whenever you have an issue. Fitting in last-minute appointments is usually much easier. Further, your doctor might even conduct house visits, which may be especially attractive during a pandemic.

Going to a doctor's office when people are more likely to be sick is already a concern. Catching something in the hospital is one of the reasons why doctors encourage new mothers and newborns to go home as soon as they are healthy enough to do so.

When people were frantically trying to get a vaccination appointment during the first round, a family with Medical Concierge Service might have been able to get an appointment with ease.

For an extra $5,000 a year, my primary care doctor offers Medical Concierge Service. His selling point is access and a comprehensive physical. If he's still practicing in 10 years, I might take him up on it. I know other Medical Concierge Services that cost an extra $25,000 – $75,000 a year.

Requires Discipline To Use An HSA As A Retirement Vehicle

In theory, having an HSA to help fund your medical costs in retirement makes a lot of sense. It's just like how renters against homeownership like to say they will save and invest the difference. However, the data shows the vast majority do not.

In practice, it may be more difficult than you think to grow your HSA balance because you can't control a lot of future medical issues. Further, you have to stay disciplined in contributing to an HSA and investing it over the long term. Sometimes, the more money you have, the more you are tempted to spend it on whatever.

If you want to diversify your financial sources in retirement, an HSA is a worthwhile investment vehicle. However, by all means, use your HSA for qualified medical expenses when they arise.

When you're working, you will likely be in a higher tax bracket than when you are retired. Therefore, it actually makes more sense to utilize your HSA before retirement if medical issues pop up.

With two young children with as yet unknown health issues, my family won't be getting a HDHP to qualify for an HSA. Maybe once our kids turn 15 and all the health issues are known, an HDHP may be more appropriate.

However, by then my wife and I will also be in our 50s and less healthy. We should also be wealthier. Therefore, getting an HSA is likely not in our future. Instead, we will probably continue to boost our taxable investments in order to increase our passive investment income.

Get Affordable Life Insurance

Just as important saving in an HSA for retirement and health expenses is getting life insurance. If you have children and other dependents, getting life insurance is a must.

Both my wife and I got two matching 20-year term policies during the pandemic. Once we did, we felt a tremendous sense of relief that both our children will be provided for in case something were to happen to us.

Check out Policygenius, an easy way to shop for affordable term life insurance quotes. The quotes are free and customized based on your situation. We used Policygenius for both our policies and saved tremendously.

Keep Track Of Your Finances

If you want to build more wealth for retirement, stay on top of your finances by signing up with Empower. It is best free wealth management tool on the web.

I've used Empower since 2012 to track my net worth, analyze my investments, and project my retirement cash flow. The more you can track your finances, the better you can optimize your finances. Don't leave your finances up to chance.

Empower Retirement Planner Free Tool
Empower's Free Retirement Planner

For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. I help people get rich and live the lifestyles they want. 

31 thoughts on “Using A Health Savings Account As A Retirement Vehicle”

  1. Can you make this a Quad Tax savings?

    My financial planner clued us into the triple threat and said, if you can pay for medical out of pocket, to do it. As a result we have a nice HSA investment going. Last year I made a mistake and deposited more money then the IRS limit. As a result I had to pay a minimal tax.

    If I recall the penalty was negligible 6% for the year , would it make sense to overfund an HSA (if you can afford it) and pay the 6% penalties? I noticed 10 of the 19 funds available in my HSA made 6.0% or better for the last year.

  2. MostlyMetal

    I started a new job and I have the option for an HSA and I’m not sure what to do. I guess my concern is if I start with $0 in this account and something major happens, do I need to pay for the max deductible right away? In other words, does the insurance plan cover anything or is it all out of pocket up front and then insurance starts to cover the expenses? I’ve read/researched everything this company has given me and I’m still a little lost which leads me to think I should sign up for the higher premium insurance this year until I research a little more.

    Any thoughts or experiences would be appreciated.

  3. Hey FS…
    Wondering if you can answer a question for me.
    If you are covered under your spouses plan, do you make the contribution to your HSA account or your spouses account?
    I had my own HSA account and insurance but left a job in August. Now I am covered under my spouses insurance. I plan on maxing out my HSA contribution in January at Fidelity. I can’t find any information on this. They talk about a “family contribution” on the IRS web site but don’t define what that is. Is there an HSA family account I’ve never heard of? As it is, my husband will have his HSA contribution pulled from his pay and I will contribute cash to HSA account and take the tax deduction from our joint account at the end of the year when we file.

  4. Another benefit of an HSA that many people aren’t aware of is contributions are pre SS and Medicare tax. The same can’t be said about 401k contributions. The savings aren’t much but will add up over time. I just wish the contribution limit was higher than it is.

  5. Channing Tatum

    I hadn’t considered the qualifying life change event giving us the option to switch plans outside of the normal enrollment period. Definitely an option to weigh for baby #2. Thank you!

  6. I have an HSA that I have been contributing for about a decade ever since it was first ordered.

    I cash flow all medical expenses by paying out of pocket and letting this account grow (it just breached 6 figures).

    It definitely is the best retirement vehicle out there with triple tax benefits. I have created a spreadsheet and scan receipts to track all my medical expenses so I can withdraw later without issue. As you mentioned the cost of medical expenses for a 65 yo couple is high and getting higher so I probably don’t even need to chronicle my current medical expenses and still take advantage of the triple tax benefit

  7. I’m a fan of HSAs as well and my wife and I have one for our family of four. However, we’re on a BCBS Pathway HSA plan, and earlier this year my wife had a scare with an eye disease. I spoke with over a dozen eye specialists during this time, and was rather surprised to get rejected by more than 90% of them because of our HSA pathway plan. The conversation would typically go:

    “Do you accept BCBS?”

    “Yes we do.”

    “Great, and to confirm, you accept the BCBS Pathway plan?”

    “Unfortunately we do not.”

    It was rather frustrating since we still pay absurd premiums, have absurd deductibles and out of pocket max, and yet kept getting turned down. I called BCBS and asked how much I had to pay them before I’d be allowed to go to a doctor. They told me the HDHP HSA plans are sometimes not accepted.

    We were fortunate to have the money to simply pay these specialists out of pocket with no insurance assistance, but just some food for others.

  8. I’m a retired State Department employee and I have had HDHPs since they were first offered. The premiums are less but more importantly the tax savings generated by my contributions essentially pay for the premiums. As a single person, the deductible is $1500 but the insurer deposits $900 per year into my HSA, resulting in a true deductible of just $600.
    I do not reside in the United States so I had hoped to continue to contribute to an HSA for the rest of my life since Medicare provides no coverage. Unfortunately I learned that once you begin to collect social security and have have turned 65, you are automatically enrolled in Medicare Part A and therefore ineligible for to contribute to an HSA. Several former govt employees even sued the govt in an attempt to not have part A but lost and were told that the only way to do this was to not receive their social security.

  9. Hi Sam, thanks for writing this article. I work in tax services with high-net-worth clients and HSA’s are fairly common among the working rich and self-employed business owners. However, they are not common among my affluent clients who derive most of their income from investments. The tax savings on contributions are often much lower when most of a person’s income is taxed at the long-term capital gains rate, but tax savings can exceed 50% for people with high levels of ordinary income. Unfortunately, California does not exempt HSA accounts from state income taxes which reduces the tax benefits in your situation. This also means that you need to manually calculate your California taxable income for your HSA because you will not get a 1099 from this account.

  10. I have a HSA for the last 5 years. I have invested tut every year and have gotten on avg an annual 35% return.
    You can pay med expenses out of pocket now and keep all the bills and get reimbursed when you hit 65 or when you start taking Medicare as you cannot do an HSA when you take Medicare
    If you continue working past 65 and still get insurance from your employer you can still
    No matter how you look at it this is a home run.
    If I were in charge of saving our healthcare system as well as social security I would have the govt allow everyone to have a HSA acct as well as Roth acct and allow a huge contribution so that everyone would have health insurance coverage that’s not job related and also have their own retirement acct. These accts would start at birth.
    If people could not afford the contribution I would have the govt give it to you.
    This would be cheaper and people would be in charge of their own health.
    This has been tried already in SE Asia and works. People tend to be healthier.

  11. I’m puzzled why rich people would think a high deductible plan is inferior. It actually pays more money than a low deductible on large claims and doctors could care less what insurance you have as long as you have a plan from a qualified provider. They will get paid exactly the same amount. Rich people usually self insure for things like long term care and don’t carry term life for the same reason. I can’t see why anyone would prefer a platinum plan except for people who can’t afford the deductible, and that’s not rich people. I believe you, you are always totally accurate in my experience but I wonder why this is the case. Is it a perception that insurance is so cheap they might as well get the most expensive they can find? I had some serious stuff done on a bronze high deductible plan with an HSA, there was no problem using it at the world’s leading clinic out of state. This is curious to me.

    1. was thinking the same thing… rich people can easily afford to have the high deductible in the first place and you’re spot on with regard to “doctors could care less what insurance you have as long as you have a plan from a qualified provider”.

    2. May be like paying for private school when you live in a highly-rated public school district. The private school may be 10% better (not noticeable), but the rich are willing to pay tons more for that 10% edge.

      1. I have a 10M+ net worth and have a high deductible plan and max out my employer provided HSA.
        I choose to go with high deductible plans for all insurances I carry (car, home, etc).
        The way I look at it, I can always cover the deductible, I just need to protect from catastrophic events and prefer to spend less on premiums.

          1. I do have 2 children but was self employed before I sold my business. My new employer sponsors the HSA and I have been contributing to it for about 4 years.
            It’s at roughly 38k at present.

  12. Make sure you do the math on health insurance options from your employer. I work for a large engineering company, and there are 3 options. I always look at the premiums plus the deductible/ out of pocket max and try to evaluate the risk. Over the last few years, the best option for me has been an HDHP because the premium plus out of pocket max is still less than the non-HDHP plan.
    It is worth noting that provider network is the same across all 3 plans.

  13. I use an HSA and can afford any plan I like. The math just made sense. My premium went from $1,500 or so down to $800. So I’m up $8,400 a year. Then I get to deduct the $7,200 (so that is roughly $2,500 I’m saving). I’m “up” almost $11,000. Now, my deductible is roughly $11,000. So, basically, I have a zero deductible plain in the worst case scenario. But, if there are no medical issues in a year (just a physical), I’m up roughly $11,000. I’m not even factoring in the tax free growth. Just the premium savings and the tax deduction.

    I didn’t put a ton of effort into this, but I’m pretty sure all that math is correct.

    Now, you mention not getting the same level of healthcare. I would be interested if you did any research on that statement. My understanding is my health plan is exactly the same as a platinum plan–I just have a massive deductible versus $1,000. The doctor doesn’t care.

    They take BCBS or they don’t. The plan is unlimited if I get cancer or similar. There is no cap or anything crazy like that (I did look at that section of the documentation for sure). After the deductible I’m pretty sure I have a platinum plan. But, I would be very interested if it turns out I don’t. As you say, I have no desire to save $11,000 at the risk of getting inferior care. That would be incredibly foolish if you can afford both plans. With that said, I would hate to pay more due to paranoid ignorance. My friends on the wealthier side all use HSA plans (they also own businesses). They find the deductible to be trivial no matter what it is ($1,000 vs. $11,000). But, they like the “self insure” aspect of HSA. It is like gambling with nothing major to lose I suppose. If you don’t get sick, you win. If you get sick, you don’t care about the $11,000 because you are sick and need care.

    Again, I see no difference in coverage for a HSA plan and a non-HSA plan within the same insurance company (BCBS, United, etc.). I think the only difference is the deductible. Maybe the prescription amount is different past the deductible? That is a trivial cost though that many could easily “self insure” around at any income level. Again, you don’t get different drugs from the pharmacy with HSA versus a platinum plan. It is the same pills. I wonder if people actually believe if you have a platinum plan you get doctors that went to Harvard, but an HSA only lets you see doctors from the Caribbean. :). I have 1,000+ doctors to choose from on my plan in my city. The same ones I could choose from when I had the platinum plan.

    I could easily see a scenario where me and my wife don’t use the doctor for at least the next decade (outside of physicals). That would leave us up over $10,000 a year. With $7,200 of it going into an HSA account, and the rest invested in taxable, that could be real money after not too long. Particularly if the $7,200 keeps going up every year. The math could be different with kids I suppose, but the “gamble” is the same I think. Unless my math is wrong, it is also not a gamble at all. If you save more than (or the same) your deductible you always win.

  14. I have been hesitant to get into the HSA game. I know it is financially better but with 3 kids, my main concern is health insurance and being covered. Everyone is healthy, but things have come up, and I worry that in a worse case scenario i would be in trouble. So my concern is access to the healthcare i want and 2nd the cost. How does one compare that to what i am traditionally use to?

  15. Sam, you left out mention of the catch-up contribution for those 55 and up. I will be stashing $8300 tax free in January.

    1. I saw the catch up of $1000 in the article. The $8300 you’re talking about is for a family, right?

  16. I’ve never had an HSA. My former employer didn’t offer them when I was working there. If they had I would have considered it during my 20s. Now that I’m in my 40s with kids, I’m happy with a medium-low deductible. Health insurance stuff sure can be a pita, but I wouldn’t dare not have it in our country. Medical care prices are insane.

  17. I absolutely LOVE and ADORE HSAs. Maybe that’s one tell that I’m not rich enough to buy the Platinum health insurance…

    In any case, I think my HSA can run up to multiple six figures by the time the retirement age comes around. I can’t wait until then.

  18. Nick Rodriguez

    For those of us on employer plans, it’s also important to evaluate the options. At both my current and previous employer, I have both traditional PPO copay and HDHP plans. At both companies, I did an analysis to choose the best plan, and the HDHP was the most attractive option in nearly every medical spending scenario. This was due to three factors – much lower premiums, employer contribution match to HSA (free money), and the income tax benefits of contributing.

  19. You note that rich people don’t have HSAs because they have better plans. However, does that matter as much if you do what you’re describing here?

    For example, throughout your younger, healthier life, you use a HDHP and HSA. You save / invest in your HSA. Then, when you get older and have more overall wealth, you switch your plan to a premium plan.

    Now, you can no longer CONTRIBUTE to your HSA, but you can certainly continue to USE what you already have in it since you own your HSA. While you can’t utilize your HSA to pay your premiums for your better health care plan, you can pay everything else. Premium plans still have co pays and at least some sort of deductible: you could use your HSA to float those costs.

  20. HSA cannot currently pay for Long Term Care directly.
    If it was allowed, and it should, it would be a no-brainer at any income/net worth level.

    However, HSA can pay the premiums on a LTC Policy.

  21. HSAs are great!

    Our family contributes the max each year and we are currently letting it grow and not reimbursing our medical expenses.

    However I am thinking about starting to reimburse our medical costs from the HSA at some point in the next couple years and investing the reimbursement in taxable brokerage investment.

    Of course HSA is the king of tax efficiency but our family is more heavily weighted to retirement investments that are harder to access, thus thinking about doing this to add some weight to the brokerage funds.

  22. Channing Tatum

    Curious what your take is on remaining on a HDHP for the long term tax advantages of the HSA even if you know you’re going to likely going to incur significant medical costs in the upcoming year (baby on the way). We opted to do this for 2022. My thinking was:

    1.) We are comfortable the healthcare options available to us within the HDHP.
    2.) The max out-of-pocket expenses we can incur on the HDHP don’t present any real cash flow/budget problem given our incomes.
    3.) Using the HSA has been a part of our long term budgeting/investing plan so just keep it simple and stay the course.

    I think it is just a question of the opportunity cost of the $$ we would have saved on medical bills by switching to the lower deductible plan option for 2022 (putting the savings into our taxable brokerage account) versus the tax advantages of the HSA and the difference is probably negligible. Am I missing anything?

    1. My wife and I switched off of our HSA plan when she was pregnant. We did the math and found we would have to pay over $3k just for the birth of everything went well. There is always a chance the birth will not go smoothly and that number would rise up to the OOP max (thankfully not the case for us). On the plan we got instead it was $125 without a significant increase in premiums. Having a child counts as a qualifying life change to change your plan back to an HSA as well outside of open season if you are interested.

Leave a Comment

Your email address will not be published. Required fields are marked *