How to Use Your HSA to Save for Retirement

The Health Retirement Account You May Not Know About

Paying at drugstore with HSA card.

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Health savings accounts (HSAs) provide a tax-advantaged means of saving for health care costs, just as the name suggests. While you might think of an HSA as a way to save and pay for current medical expenses, an HSA is an excellent way to save for retirement as well.

Because you can place money in an HSA (which pays interest), you can take advantage of compound returns to accumulate a tax-advantaged pool of money to pay for health care tax-free in retirement.

Let’s look at how an HSA can provide you with substantial benefits as a retirement account.

What Is a Health Savings Account?

An HSA is an account that you can deposit money into for the express purpose of saving for medical expenses. You can deduct contributions to an HSA just like contributions to a 401(k) or IRA. However, a key difference is that you can also withdraw the money tax-free as long as you use it to pay for qualified medical expenses.

The IRS imposes an annual limit on the amount you can deposit into your account: $3,650 for an individual and $7,300 for a family in 2022 ($3,600 and $7,200 in 2021). Any contributions you make above the annual limit could incur a 6% tax.

HSAs Are Distinct From FSAs

HSAs are a different form of account than flexible spending arrangements (FSAs), so be careful not to confuse the two. A key difference is that unlike the money in an HSA, you can’t keep the money left in your FSA at the end of the year. That means that FSAs don’t provide the same potential as a retirement savings tool that HSAs do.


One perk to note about FSA's is that under the Consolidated Appropriations Act, a health FSA allows you to carry over unused benefits from a plan that ends in 2021 to a plan ending in 2022.

How an HSA Can Help You in Retirement

You can use an HSA as a retirement savings vehicle by investing your contributions and withdrawing money for qualified medical expenses in retirement. When you treat your HSA this way, you benefit from what’s known as a “triple tax advantage:”

  • You get to deduct contributions, up to the current IRS limit, from your income. 
  • Your earnings grow tax-free; you won’t owe any taxes on the dividends, interest, or capital gains inside the HSA. 
  • Any withdrawals to pay for qualified medical expenses in retirement are also tax-free.

What Are Qualified Medical Expenses?

Generally, the tax-deductible medical and dental expenses outlined in the IRS Pub. 502 are considered “qualified medical expenses.” The qualified medical expenses list encompasses more than 75 expenses and includes medical, dental, vision, and certain medications.

When using an HSA to cover medical expenses, you must establish your account before incurring the expense to be considered qualified. And if using a rollover HSA, the established date will be the date of the original HSA.

Can I Open an HSA?

You can open an HSA on your own or through an employer if your employer offers one.

However, not everyone is eligible to open an HSA. To be able to open an HSA, the following requirements must be met:

  • You need to be enrolled in a high deductible health plan
  • You can't be claimed as a dependent on someone else's tax returns
  • You cannot be enrolled in Medicare
  • You have no other form of health coverage

An HDHP is defined by the deductible and out-of-pocket expenses. The amounts change each year, and for 2021 and 2022, an HDHP is one for which the annual deductible is at least $1,400 for individual coverage and $2,800 for family coverage. The out-of-pocket limits cannot exceed $7,050 for an individual or $14,100 for family coverage ($7,000 and $14,000 for 2021).

Rules for Using Your HSA in Retirement

As with any tax-advantaged plan, some rules dictate when and how you can use the money in your HSA. 


Unlike an IRA or 401(k), you don’t have to take required minimum distributions (RMDs) from an HSA.

As long as you use the money to pay for qualified medical expenses, then you won’t owe any taxes at all on a distribution—regardless of when you take it. But what if you withdraw the money to pay for things other than qualified medical expenses? 

If you are under 65, the IRS taxes the distribution as ordinary income, and you may owe a 20% penalty. Once you turn 65, you’ll no longer have to pay a 20% penalty. At that point, your HSA effectively functions like an IRA, except that you can take tax-free distributions to pay for qualified medical expenses.

Particularly beneficial for retirees, an HSA allows you to take tax-free withdrawals to pay for Medicare premiums, except for Medicare supplemental policy premiums. However, once you start Medicare, you are no longer eligible to contribute additional money into your HSA.


A Health Reimbursement Arrangement (HRA) is another type of account that is similar to an HSA. However, only your employer contributes to an HRA, and HRAs cannot move with you to a new employer.

This table highlights a few of the key differences between an HSA and HRA:

If you switch employers, you can take it with you If you switch employers, you lose it
The employee and employer can make contributions Contributions come from employer only
HDHP coverage required HDHP coverage not required
Contribution limits set by IRS Contribution limits set by employer

How an HSA Might Beat Your 401(k)

Although we typically think of retirement accounts like 401(k)s as the primary source of money in retirement, there are two main ways an HSA can provide even better benefits as a retirement account. 

  1. An HSA gives you a triple tax advantage. Even though contributions to a 401(k) are pre-tax, the deductions will be considered taxable income.
  2. HSAs do not require RMDs. You can continue to let your account grow even after you would otherwise have to start taking RMDs from a 401(k). This gives you more flexibility and control.

Remember that an HSA is not meant to replace a 401(k), as you can use your 401(k) withdrawals for more than just the medical expenses an HSA limits you to. By using both a 401(k) and an HSA, you can save the maximum amount to each.

Key Takeaways

  • HSAs allow you to save money for qualified medical expenses completely tax-free.
  • Withdrawals to pay for things other than qualified medical expenses are taxed at your income tax rate.
  • You can allow the earnings to accumulate, unlike an FSA, which is “use-it-or-lose-it."
  • HSAs can be used in addition to retirement accounts such as 401(k)s.
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  1. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Pages 3, 5, 8.

  2. Internal Revenue Service. "26 CFR 601.602: Rev. Proc. 2021-25."

  3. Internal Revenue Service. "Additional Relief for Coronavirus Disease (COVID-19) Under § 125 Cafeteria Plans," Page 6.

  4. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 3.

  5. Internal Revenue Service. "Publication 502, Medical and Dental Expenses," Pages 5-15.

  6. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 9.

  7. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Pages 3-4.

  8. Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)."

  9. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Pages 7, 9, 10.

  10. Internal Revenue Service. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 18.

  11. Internal Revenue Service. "Roth Comparison Chart."

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