There is a variety of tools that can help you save for retirement. While many of us know about 401(k)s and IRAs, not as many may be familiar with health savings accounts (HSAs). These are savings accounts designed for people with high-deductible health plans. Funds from an HSA account can cover qualified medical expenses and come with a trifecta of tax advantages. Because of these benefits, retirees and those saving for retirement may consider leveraging these accounts. Here are ways you can make your HSA work for you in retirement.

For help with HSAs and other retirement planning accounts and strategies, consider working with a financial advisor.

What Is an HSA?

An HSA is a type of savings account funded with pre-tax dollars that can be use pay for qualified medical expenses. While that generally doesn’t include premiums, you can use those untaxed dollars for coinsurance, copayments and deductibles (among other expenses).

You are required to have a high deductible health plan (HDHP) to qualify for an HSA. An HDHP often comes in the form of a health plan that covers a minimum amount of preventive services prior to the deductible. If you are searching for plans in the Marketplaces, you can find out if they’re eligible for an HSA when you view them.

You can open your own HSA through certain financial institutions or through your workplace. The latter allows you to make contributions via payroll deductions. But the ability to contribute stops after you enroll in Medicare, so it’s important to max it out before then.

As long as you have an HDHP, you are eligible for an HSA account. Once you have one, you decide how much money you contribute to it. However, you must abide by the government’s maximum limits. The HSA contribution limits for 2024 are $4,150 for an individual account and $8,300 for a family account that individuals under 55 years old own. Although, after 55 you can make annual catch-up contributions worth $1,000 more. These limits apply to the total amount of contributions from both the employee and employer.

The money you contribute gets excluded from your taxable income, lowering your potential tax bill. This does not apply to excess contributions, though, which incur a 6% tax penalty and cannot be deducted from taxes. The distributions from your HSA are tax-free when you use them for qualified medical expenses. This typically requires you to prove your expenses with receipts. Or, if your HSA provided a debit card, you can use that instead. But you don’t have to worry about any unused funds since the account has an annual rollover.

Benefits of HSAs for Your Retirement

HSAs come with three tax advantages that put them ahead of other savings or investment accounts. That includes: tax-free contributions, income tax-free qualified withdrawals and income tax-free investment growth and interest earnings. With that as the basis for an HSA account, they offer a range of benefits. Here’s how you can use them to your advantage during retirement.

Designate HSA Funds for Healthcare Costs

Healthcare can be expensive, especially the older you get. Potential hospital bills, medical procedures, prescription medication and nursing home costs could hit at any time or sooner than you think. That’s why it’s important to stockpile funds for a nest egg now.

According to Fidelity’s Retiree Health Care Cost Estimate, a 65-year-old who retires in 2024 may need approximately $165,000 for retirement healthcare costs. With that in mind, saving assets to cover healthcare is a vital step in retirement planning. Because of that, you’ll want to ensure you put away enough funds in your HSA specifically for medical care.

Capitalize on Compound Interest by Investing HSA Funds

Healthcare is a consistent cost we need to think about. But even if you see your medical bills rising in the future, you don’t need to panic. You may just have to find ways to bulk up your savings. One way to do that is by developing an investment strategy early on.

Examine the funds you intend to put away into your retirement account. Instead of contributing all of the money, consider putting some aside in your HSA for investing purposes. By dedicating a portion of these savings for possible tax-free growth, you can give your retirement better financial footing.

There are a few ways to invest those funds, though. Your methods should depend on the type of investor you are and your risk tolerance. A higher risk tolerance may call for a more aggressive strategy, whereas lower risk requires caution.

Use HSA Funds for Other Qualifying Expenses

Your HSA funds will cover a range of qualified medical expenses, such as vision care, nursing services, dental care or hearing aids. But once you retire, other ways to use your funds become available to you. For example, you may decide to retire before age 65. In that, case you may have a time period where you lack medical coverage. That’s because you are off your workplace plan, but you are still too young for Medicare eligibility.

Usually, you can’t use HSAs for private health insurance premiums. However, you can use them if the coverage is an extended employer-sponsored plan through COBRA. Your funds may also cover premium costs if you receive unemployment compensation. This works at any age but may be particularly helpful for that early retirement gap.

Once Medicare kicks in, you can use it for certain expenses, such as Part B premiums and Part D prescription drug coverage. That also includes supplemental policy premiums (Medigap) but only for retirees over age 65 with an employer-sponsored health plan.

Alternatively, HSA funds may partially cover the cost of a long-term, tax-qualified car insurance policy. Or, if you are 65 or older, your funds may go toward nonqualified medical costs. However, this last option forfeits some of your tax advantages.

Include Your HSA in Your Estate Plan

When you set up a traditional IRA, you name a beneficiary. The same applies to an HSA, wherein you choose someone to receive any unused funds following your death. Generally, deciding where your HSA assets go at that point falls into one of three categories:

Your spouse is the designated beneficiary: Upon transfer, the HSA gets treated as if it belongs to your spouse. That means it continues to receive the same tax benefits.
Your spouse is not the designated beneficiary: If the beneficiary is not your spouse, the HSA stops being an HSA. The account’s fair market value becomes taxable in the year you die to your beneficiary.
Your estate is the beneficiary: The HSA’s fair market value is part of your final income tax return.

Most people would choose their surviving spouse as the beneficiary. However, if you do not have that option, you may want to consider the most-tax efficient choice. One beneficiary might be in a lower tax bracket than the other, making it the stronger option. Naming your estate will likely lead to your HSA becoming a probate asset, though.

Because of complications like these, make sure you talk with a professional before you make your decision. An estate planner can help you with every step of the process, including drafting a will and minimizing taxes for your beneficiaries.

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Bottom Line

Healthcare is incredibly personal. Because of that, the best decision for one person may not be the same for another. HSAs come with triple tax advantages, a range of qualified expenses and the ability to invest. However, HSAs are only available to people enrolled in HDHPs, which come with their own drawbacks. There are multiple ways to build up your savings for retirement. If you are unsure whether an HSA is the right choice for you, consider talking with a financial professional.

Tips on Saving for Medical Expenses

Incorporating an HSA into your estate or retirement plan will require some careful thought. You could benefit from the guidance of a financial advisor when navigating that process, though. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
HSAs are for more than medical expenses – it’s possible to invest using them, too. But if you choose to put your money into any securities or mutual funds, make sure you consider the costs. You may run into restrictions or high fees. See what your HSA provider requires when it comes to investing with your account.