Make your HSA part of your retirement planning

May 20, 2021

Health Savings Accounts (HSA) have gained popularity as a way to compensate for higher deductibles and out-of-pocket expenses related to Medical Insurance. Think of an HSA as a medical savings account. Your contributions are tax deductible, grow tax deferred, and come out tax-free when used for eligible medical expenses.

Most people use the money in their HSAs as medical expenses arise, and don’t see too much money accumulating in the account year to year.* However, we do see people who leave their money in the HSA – either because they don’t have out-of-pocket medical expenses or they decide to pay medical expenses out of their monthly budget instead of the HSA -- and the accumulated HSA contributions become part of their retirement planning.

Here’s how to use HSAs as part of your retirement planning:

Assuming you qualify to contribute to an HSA, and are financially able to let those contributions roll over and accumulate, many HSA providers allow your contributions to be invested. Much like how IRA contributions can grow and build over time, an invested HSA can do the same. Just be sure to get your HSA contributions invested; you probably don’t want to leave HSA money you won’t be using soon sitting in cash.

Why let HSA funds build up?

Once you are 65 years old, in addition to using your HSA for the list of eligible medical expenses (co-pays, deductibles, etc) you can withdraw money from the HSA tax-free to reimburse yourself for Medicare Part B premiums. You can also use the HSA money to pay Medicare Part D premiums, as well as premiums for Medicare Advantage plans (but not medigap).

Health insurance and medical expenses can be significant line items in retirement. Being able to make tax-free withdrawals from an HSA can help fund those expenses in a tax-advantaged way.

Do you qualify for an HSA?

Just because you have a high-deductible plan doesn’t mean it necessarily qualifies you to invest in an HSA. Not only does your health insurance need to have a higher deductible than most, it has to have certain limits on out-of-pocket expenses and require you to pay for everything except wellness, preventative and accident expenses until the deductible is met. Out of pocket expenses can be high when you have a high-deductible plan, this is why you are allowed to set aside pre-tax money to help cover those expenses. Check with your insurance provider – an HSA-eligible insurance plan will be labeled as such.

If you’re a person who doesn’t use medical services very much, or can pay for them out of your monthly budget, your HSA contributions can be allowed to grow and used at a time in life when some extra tax-free money for medical expenses can make a big difference.

Explore this and other ways to help fund your retirement.

* Unused HSA funds roll over every year; there’s not a “use it or lose it” policy like on employer FSAs (Flex Savings Accounts).