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This Chart Shows How Contributing to an HSA Can Pay Off Big


Contributing to a 401(k) or individual retirement account (IRA) isn’t the only way to save for retirement. While most people think of health savings accounts (HSAs) as tools for covering annual medical expenses, they can also be valuable retirement savings vehicles.

HSAs are unique because they benefit from a trio of tax advantages. First, contributions lower your income tax liability. Second, an HSA balance grows tax-free and can even be invested in mutual funds, so you won’t pay taxes on investment gains. Lastly, you won’t have to pay taxes on the money when you withdraw it, provided it’s used to pay for qualified health expenses.

And unlike flexible spending accounts (FSAs), HSA balances don’t need to be spent in a given year. The money is yours forever.

If you need help planning for medical expenses in retirement and getting the most out of your HSA, talk to a financial advisor.

That’s why HSAs are such valuable tools for retirees, who may incur significant medical expenses, especially later in retirement. A recent study from the Employee Benefit Research Institute found that a couple with median prescription drug expenses will need $296,000 saved to all but guarantee the ability to pay for medical expenses in retirement.

Like conventional retirement accounts, HSAs are subject to contribution limits, which typically go up every year. The IRS also allows people 55 and older to make catch-up contributions to their HSAs. (But remember: HSAs are only offered to people enrolled in high-deductible health plans.)

To understand the extent to which an HSA can be an effective way to cover health care costs in retirement, we sought to explore the results of three different approaches to this savings vehicle.

Our Analysis

SmartAsset set out to determine how much an investor could save by maxing out his HSA and making catch-up contributions starting at age 55. To do this, we created three hypothetical scenarios and ran the numbers.

Each scenario examined how a 55-year-old’s HSA balance would have grown during the 10-year period that spanned January 2012 through December 2021. We assumed all three investors started with $10,000 in their HSAs but used a different saving strategy:

  • Scenario 1: A hypothetical investor named Steve makes no additional contributions to his HSA from the start of 2012 through the end of 2021.
  • Scenario 2: A hypothetical investor named Jermaine maxes out his HSA every year during the same period of time.
  • Scenario 3: A hypothetical investor named Kim maxes out her HSA and makes catch-up contributions each month, as well.

We assumed all three HSA balances would have been fully invested in funds that track the S&P 500 during that 10-year span and calculated the final balances using the monthly performance of the index.

Lastly, in the second and third scenarios, we assumed Jermaine and Kim both consistently contributed to their HSAs every month.

Scenario 1: No HSA Contributions

In our first scenario, Steve was no longer contributing to his HSA at age 55 in 2012. Therefore, over the course of the next 10 years, the growth of his account balance was completely reliant on the performance of the S&P 500. Luckily for Steve, his HSA more than tripled in value, going from $10,000 in January 2012 to $34,300 by the end of December 2021.

Scenario 2: Maximum HSA Contributions

In our second scenario, Jermaine made the maximum individual annual contribution to his HSA each year during the same time period. In 2012, that meant Jermaine contributed $258 per month ($3,100 per year). By 2021, the HSA contribution limit had steadily risen to $3,600, meaning Jermaine was saving $300 per month in his HSA.

His diligent saving paid off. During that timeframe, Jermaine contributed a total of $33,850 to his HSA, which grew to $100,931 by the end of 2021!

Scenario 3: Maximum Contributions Plus Catch-up Contributions

Our third and final investor, Kim, opted to supercharge her HSA account by adding catch-up contributions ($1,000 per year) on top of individual maximum contributions. As a result, Kim saw her monthly HSA contributions go from $342 in 2012 to $383 in 2021.

By the end of 2021, Kim’s HSA balance had swelled to $120,854! That means, despite contributing only $10,000 more than Jermaine, she ended up with nearly 20% more cash.

Bottom Line

While HSAs are a great way to save for medical expenses, they’re an even more effective long-term savings vehicle thanks to their tax advantages. By maxing out an HSA and making catch-up contributions starting at age 55 in 2012 with a starting balance of $10,000, an individual would have saved more than $120,000 by the end of 2021. That money could go a long way to pay for significant medical bills that could pile up late in retirement.

Retirement Planning Tips

  • Planning for retirement can feel like solving a complicated puzzle. A financial advisor can help you put the right pieces together by assessing your needs and connecting you with the services that are right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Social Security plays a critical role in the retirement plans of many. By delaying Social Security beyond your full retirement age, you can increase your benefit up to 8% per year until age 70. SmartAsset's Social Security Calculator can help you determine the best time to claim your benefits.
  • If you're considering a Roth conversion, Vanguard suggests doing a series of partial conversions instead of a single conversion. Breaking up your conversion into multiple transactions can significantly limit the taxes that you'll end up owing on the money, Vanguard found.

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Photo credit: © Anastasiia iStock contributor