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Why An HSA Should Be Part of Your Retirement Plan

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HSA – health savings account symbol, words on wooden blocks. Medical concept.

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Part of saving for retirement is creating a cushion to soften the blow of healthcare expenses that tend to grow as a person gets older. But 401(k)s and IRAs aren’t the only way to save for your future. Health Savings Accounts are another great way to save for this major retirement expense—plus, they come with added tax benefits.

“It’s a very good place to put retirement money as you prioritize savings accounts,” says Andy Leung, a private wealth advisor with Procyon Partners in Connecticut.

Contributions to health savings accounts are made on either a pre-tax basis or are tax-deductible, depending on your employment situation. Earnings within the accounts and withdrawals for eligible healthcare expenses also are exempt from taxes. “It’s triple tax savings,” Leung said.

And if you’re relatively healthy, money in an HSA can really add up over time.

How Your HSA Can Work For You

HSAs aren’t intended as a replacement for other types of retirement accounts. They have lower annual contribution limits—$3,600 for an individual and $7,300 for a family in 2022—than 401(k)s and IRAs and don’t come with perks like employer matching.

But like retirement accounts, the balance in an HSA can be invested, allowing the funds to grow more quickly than they would even in a high interest rate savings account. Schwab and Fidelity, for example, allow customers to invest HSA money in stocks, bonds, mutual funds, Exchange Traded Funds and more. “An HSA can be invested in whatever that plan allows,” Leung says.

Unlike Flexible Savings Accounts, whose balances have to be exhausted by the end of each year, money in an HSA doesn’t have an expiration date. So you can say goodbye to that annual end-of-year FSA drugstore run to stock up on bandages, antacids, or menstrual products and hello to the power of compounding. Investing $2,000 in unused money through an HSA could add up to nearly $90,000 over 20 year, Fidelity estimates.

The Fine Print

While you can leave your money in an HSA for as long as you like, you can only fund an HSA when you have a high-deductible health insurance plan, defined by the IRS as any plan with an out-of-pocket deductible above $1,400. If you’re shopping for insurance on the healthcare marketplace in your state, these tend to be bronze- and silver-level health insurance plans. You can take your HSA with you if you change health insurance, but your new deductible will determine whether you can make additional contributions to your HSA.

Keep in mind that if you are eligible to contribute to an HSA, you don’t have to max it out. “You can incrementally increase your savings as your salary grows,” says Amy Richardson, a certified financial planner with Schwab Intelligent Portfolios Premium.

And in retirement, that extra money could come in especially handy. Fidelity estimates healthcare adds up to about 15 percent of the average retiree’s annual expenses. It recommends couples who are 65 or older budget about $300,000 for medical expenses in retirement.

“Medical expenses are one of the biggest line items in retirement budgets,” Richardson says.

Use Your Money When You Need It

Just because you can let the money in your HSA grow over time doesn’t mean you should, especially if you’re facing medical bills that are breaking your budget. “You don’t want to not touch that and incur credit card debt,” Richardson says.

Unlike 401(k)s and IRAs, you can withdraw money from an HSA without a financial penalty at any time as long as you use the funds for eligible healthcare expenses. That broad list of eligible expenses includes insurance premiums, prescriptions, medical procedures, and more. And best of all? Unlike a credit card, there’s no interest to pay when tapping into your own HSA savings.