Retirement Saving

How to Use a Health Savings Account to Plan for 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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