Retirement Saving

How to Use a Health Savings Account to Plan for Retirement

Have you started saving for retirement yet? If the answer is “no”, you’re not alone. According to the Employee Benefits Research Institute’s 2016 Retirement Confidence Survey, 36% of workers aren’t actively saving anything for their later years.

If you’re ready to get started with ramping up your retirement savings, your employer’s plan is a good place to start. Besides a 401(k), however, you might have another retirement savings option that you’re not even aware of–a Health Savings Account (HSA).

Even though it’s designed to be used for medical expenses, an HSA can be a valuable tool to save for retirement so here’s the skinny on how to use one to your advantage.

What is a Health Savings Account?

Without making things too complicated, a Health Savings Account is a special kind of tax-advantaged savings account that’s tied to your health insurance plan. You have to be enrolled in a high deductible plan for an HSA to be an option.

These accounts–similar to Flexible Spending Accounts (FSAs)–are meant to help you save pre-tax dollars towards your future medical expenses. The main difference is that unlike an FSA, you don’t have to spend down the cash in your HSA each year. You can simply roll it over from year to year until you actually need to use it. For example, if you know one of your kids is going to need to braces down the line, you could save for it now using your HSA.

The Internal Revenue Service (IRS) limits how much you can save in an HSA each year. The amount you can chip in depends on whether you have individual or family health insurance coverage. For 2017, the individual coverage contribution limit is $3,400; for family coverage, it’s $6,750. If you’re 50 or older, you can tack on an extra $1,000 in catch-up contributions.

Your employer can make matching contributions to your account but altogether, you and your employer can’t contribute more than the annual limit. Because an HSA isn’t specifically designated as a retirement account, you can save in one of these accounts and still put money into a 401(k) or an Individual Retirement Account (IRA), which is a plus if you’re trying to make up for lost time.

How a Health Savings Account Can Boost Your Retirement

Health Savings Accounts are tax-advantaged in more ways than one. First, the money you save in one of these accounts is tax-deductible. Deductions, if you don’t already know, reduce your taxable income for the year. Less taxable income = potentially less you have to pay to Uncle Sam.

When you save in an HSA, the money grows tax-free when you use it for qualified medical expenses. That includes things like:

  • Dental care
  • Doctor’s visits
  • Prescription drugs
  • Vision care
  • Physical therapy
  • Hearing care

As long as the money you’re pulling out of your HSA is going towards a qualified medical expense, you won’t pay a dime in taxes on it. Unlike a traditional IRA or a 401(k), you don’t have to take required minimum distributions from an HSA once you turn 70 ½ either. So what does that have to do with your retirement?

If you manage to stay healthy, you can use the money in your HSA as a source of backup income to supplement Social Security or any other retirement savings you may have. You can take funds out of your HSA at any time, for any purpose other than health care, with one hitch. If you’re younger than 65 when you take a nonqualified distribution, you’ll pay a 20% tax penalty, plus regular income tax on what you withdraw.

After age 65, the 20% tax penalty goes away. You’ll still be on the hook for paying income tax on any money you withdraw that isn’t used for medical expenses. If you think you may be in a lower tax bracket one you retire, however, it may not inflate your tax bill too much.

If you’ve got access to an HSA, it could be a useful way to delay taking Social Security benefits. You can start taking Social Security at age 62 but for most people, full retirement age is either 66 or 67. If you begin drawing Social Security any time between age 62 and your full retirement age, the Social Security Administration reduces your benefit check slightly. If you can hold out until age 70 to take benefits, on the other hand, you’ll get an 8% raise.

That’s something to consider if you’re getting a late start on saving or you’re concerned about running out of money in retirement. As of December 2016, the average monthly Social Security retirement benefit was $1,315. That may cover some of your costs but unless you’re prepared to live on an exceptionally tight budget, it’s only going to go so far. A Health Savings Account could help you get a little more mileage out of your dollars and cents.

Don’t Forget About Medicare

One thing you need to keep in mind about Health Savings Accounts is that you can only make contributions while you’re enrolled in a high deductible health plan. Once you sign up for Medicare Parts A and B (also known as Original Medicare), you can’t funnel anymore cash into your HSA. You don’t have to withdraw the money; you just can’t add anything else to it.

Medicare eligibility begins the year you turn 65. You can hold off on enrolling if you’re still working but once you retire, you’ve only got a small window of time to sign up to avoid paying a penalty. Medicare Part A, which is your hospital coverage, is free but Part B (medical insurance) comes with a premium. For every 12-month period that you delay enrolling in Part B, your monthly premium goes up by 10%.

These premiums are deducted directly from your Social Security benefits if you’re receiving them, so just remember that waiting to enroll in Medicare could shrink your monthly check. Looking at your bigger retirement picture can help you figure out how to make the most of your HSA without short-circuiting Social Security or putting your Medicare enrollment in jeopardy.

About the author

Rebecca Lake

Rebecca Lake is a personal finance writer and blogger specializing in topics related to mortgages, retirement and business credit. Her work has appeared in a variety of outlets around the web, including Smart Asset and Money Crashers. You can find her on Twitter at @seemomwrite or her website,


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