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Fidelity Says This Is How to Get More Out of Your HSA


Health savings accounts (HSAs) are one of the least-known retirement tools available but they can make a big difference in preparing for what can be the biggest concern in retirement – covering healthcare costs. That’s because HSAs offer a triple tax benefit: your money goes in tax-free, your account earnings aren’t taxed and withdrawals for qualified medical expenses are tax-free.

Now, after years of minimal increases, HSA contribution limits are getting their biggest boost since the accounts were first offered in 2004. This gives you a perfect chance to consider how an HSA can fit into your overall retirement and investing plan and to consider strategies to help get all you can out of your account.

If you need help planning for retirement or integrating an HSA into your financial plan, consider working with a financial advisor.

How to Get the Most Out of Your HSA

Fidelity recently offered some tips for optimizing your HSA. This trio of HSA tax benefits gives you the opportunity to allocate your savings for near-term medical expenses, save for possible medical emergencies and put away cash to cover long-term medical costs in retirement.

Align Your HSA Asset Allocation With Your Near-Term Medical Needs

If you’re saving for immediate and ongoing health expenses, Fidelity recommends you keep your HSA balance in cash to cover medical bills as they come up. Reviewing your past few years of medical expenses can give you an idea of how much money to set aside in cash before targeting additional contributions for other goals.

Use Your HSA as an Emergency Medical Fund

Contributing more than what you need to cover your ordinary medical costs gives you the opportunity to build a reserve to handle medical costs in an emergency. If you lose your job or face some other income disruption, the additional HSA money also allows you to stretch a non-medical rainy day fund by having other assets on hand for medical expenses.

To build a balance for a potential medical crisis, Fidelity advises that you invest conservatively, limiting stock holdings to between 20% and 40%, with the remaining balance invested in bonds.

Use Your HSA to Plan for the Long Term

When it comes to long-term financial planning, remember that your HSA is the most tax-advantaged account you have so contribute accordingly. The most recent Fidelity Retiree Health Care Cost Estimate estimates that the average retired couple could need $315,000 in after-tax savings to cover health care expenses in retirement.

Any money set aside for health expenses in retirement can be invested to match or complement your other retirement savings. The additional savings help prevent medical costs from eating away at the rest of your retirement nest egg.

One More Benefit for HSAs

Once you turn 65, withdrawals from an HSA for non-medical reasons aren’t penalized but are taxable, much like distributions from an IRA. At death, the balance can pass to your spouse with all the tax benefits intact. If the money goes to another named beneficiary, it’s taxed as regular income in the year it’s received.

New HSA Contribution Limits

Fidelity Says This Is How to Get More Out of Your HSA

Keep in mind that HSA contribution limits are rising in 2024.

Individuals will see their savings cap increase 7.8% in 2024, going from $3,850 to $4,150. For family coverage, the HSA contribution limit rises to $8,300, up 7.1% from $7,750 this year.

That’s the largest increase to HSA contribution limits since the accounts were first introduced in 2004. The big bump is on top of this year’s sizable 5.5% increase from 2022 contribution limits, and is sharply up from the tiny 1.4% increase between 2021 and 2022. The extra catch-up contribution for account holders 55 and older remains fixed at $1,000.

Bottom Line

A health savings account (HSA) is a highly flexible tax-advantaged account that can be used to boost your retirement investments in several ways. Because contributions aren’t taxed, that leaves more money to invest for retirement, and contributions that go beyond covering current medical costs can be used for a medical emergency fund and to cover unpredictable medical expenses in retirement. 

Retirement Planning Tips

  • Long-term financial planning isn’t easy, and covering unpredictable expenses for medical emergencies and healthcare in retirement is especially difficult. A financial advisor can help with this though. Finding a 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.
  • Will your savings be enough to support your retirement? Answering this question can be tough, but SmartAsset’s retirement calculator can help you do just that. The tool estimates how much your savings will be worth by the time you retire, as well as how much money you’ll need to support your lifestyle.

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