How to Use Your HSA for Retirement [Tax-Efficient Investing Tool]

You’ve probably heard of Roth IRAs and 401(k)s, but there’s a lesser-known account that could help you build wealth and take advantage of tax benefits in retirement: the health savings account (HSA). Most people know that they can stash money in health savings accounts to tackle future healthcare costs. However, what you might not know is that HSAs can be used in accordance with traditional retirement accounts to grow your money and reduce your income tax bill now and after you retire. That tax savings equates to more money in your pocket, which is good news for you. However, not everyone can participate in health savings accounts and their great tax perks. So it pays to understand not just how to use HSAs, but how to be eligible for one in the first place. Here’s what you need to know about qualifying for an HSA, how these accounts work, and how to use your HSA as a tax-efficient investing tool for retirement. 

Do I Qualify for a Health Savings Account (HSA)?

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To be eligible for a health savings account, you’ll need to be enrolled in a qualifying high-deductible health plan (HDHP). If you enroll in a high-deductible health plan through your employer, you can open an HSA account through your employer if they also offer that, but if not, you can sign up for your own personal HSA account. For 2023, deductibles with an HDHP are at least $1,500 for self-only coverage or $3,000 for family coverage ($1,600 or $3,200, respectively, for 2024), which can be a hefty sum to pay out of pocket. But pre-tax money saved in your HSA can be used to offset those costs and other qualified medical expenses.

How Does an HSA Work?

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You fund a health savings account with pre-tax dollars, which can be used to pay for planned and unplanned medical bills. Typically, your employer will automatically contribute from your paycheck before taxes are applied. However, in some cases, you might need to contribute post-tax dollars and then claim a deduction for that money when you file your taxes. “HSA dollars roll over year to year,” explains Nate Black, VP, Consumer Driven Health at Voya Financial, and thus you don’t have to spend your HSA balance before the end of the year. He adds that you can take that money with you when you change jobs. Some companies will keep your account open, but if not, you can roll it over into your new employer’s HSA plan or into your own personal account. (If you already have a personal account, you won’t need to change accounts.) This is different from a flexible spending account (FSA). FSA money is “use it or lose it”—“you’re putting your dollars in, and if you don’t spend them during the year, you might lose those contributions,” Black says. Moreover, the account is employer-owned, so you can’t take it or the money with you if you change jobs. While a health savings account isn’t a retirement account, per se, HSAs do have an investment component that can be used toward retirement. Just note that some HSA administrators require a minimum balance before investing. And as with a retirement account, HSAs are subject to contribution limits. For 2023, you can contribute up to $3,850 if you have healthcare coverage for just yourself, and up to $7,750 if you have coverage for your whole family. In 2024, the self-coverage max increases to $4,150, while family coverage jumps to $8,300. These limits include both employer and individual contributions, so be mindful of that if your employer contributes a certain amount to an HSA on your behalf. You can also make catch-up contributions of $1,000 beyond those limits once you reach age 55. Yes, HSA contribution limits are fairly low relative to certain retirement accounts. However, they’re a great place to stash additional pre-tax cash if you want to invest more and have maxed out contributions to your other accounts.

What Are the Tax Benefits of Health Savings Accounts?

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Health savings accounts offer a fantastic “triple” tax advantage:

• Contributions are pre-tax if your HSA is employer-provided or post-tax but tax-deductible if you’ve signed up for a personal HSA. This exemption is from federal income, Social Security, and Medicare taxes. Contributions are also exempt from state taxes in most states.
• Investment gains, dividends, and interest income are tax-free.
• Withdrawals for qualified medical expenses are tax-free, too.

Even better: Employer contributions to your HSA enjoy the same tax benefits. Now, you will be taxed on withdrawals if you pull HSA funds for a non-qualified expense before you reach age 65—and you’ll incur a 20% tax penalty on top of that. Thus, if you do put money in your HSA, make sure you won’t need those funds for anything other than qualified medical costs for a while. After age 65, however, you can treat your HSA like a traditional 401(k): You’ll still be taxed on non-qualifying withdrawals, but you won’t incur the 20% penalty.

Can I Invest Money in My HSA?

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Most health savings accounts offer an investment component, though different HSA providers have different rules about when participants can invest. Many require that you meet a minimum savings threshold before you’re allowed to invest through your HSA. For example, certain health savings account providers require a minimum spending account balance of at least $1,000 before you can invest. (Some thresholds are higher, others are lower.) Certain HSAs also have no minimum requirement to start investing. For instance, with a Fidelity HSA, the minimum balance to invest is $0, so you can start investing with very little money. A small or no minimum balance requirement can be useful for those who don’t have much money to toss into a health savings account. What you’re allowed to invest in can also vary based on your HSA. Some providers, like Fidelity, allow you to invest in various asset classes, including stocks, bonds, mutual funds, and ETFs. Others have a more specific set of investment options. And while it’s uncommon, a few HSAs even let you invest in fractional shares. If you currently use an HSA account, ask your HSA provider about whether (and how) you can use it to invest.

Can I Use My HSA for Retirement?

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You might spend years investing money in your HSA, so it’d be a shame if you couldn’t use that balance in retirement. Fortunately, you can—and HSAs’ tax advantages even help reduce your burden at retirement. We mentioned that HSA savings can be used for qualified medical expenses before age 65. If you use them for non-qualified expenses before age 65, you’ll pay taxes on the withdrawal and a 20% penalty. However, at age 65, if you use HSA distributions to cover non-qualified expenses, you’ll still be taxed but not pay a penalty, similar to withdrawing from a 401(k). So if you’d like to take a European vacation in retirement and use HSA funds to pay for it, you can do so without suffering that additional penalty.

Is an HSA a Good Place for My Retirement Savings?

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Because health savings accounts offer so many tax advantages, and because HSA money can even be used in retirement, an HSA is an excellent place to stash some cash for your future. Remember: You’re not going to suddenly stop racking up qualified healthcare expenses in retirement. Ambulance costs, blood sugar tests, lab fees, walkers, canes, and wheelchairs—even some Medicare expenses—are all qualified costs, and thus you can enjoy full tax exemption when you withdraw HSA money to pay them, before and during retirement. And if you use your HSA money to pay for non-qualified expenses once you reach age 65, then it’s basically like withdrawing from your 401(k). You’ll pay income taxes, just like you would with a 401(k), but no 20% penalty.

How Can I Use My HSA for Retirement?

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When it comes to using your HSA in retirement, think of it like a 401(k) with a healthcare kicker. Given that healthcare costs are significant in retirement—Fidelity estimates a couple that’s 65 will pay about $315,000 toward their healthcare in their later years—it could make sense to continue using your HSA money to help offset medical expenses. Unfortunately, while many people assume Medicare will cover all their future medical expenses, this generally isn’t the case. You could also use your HSA balance to cover unexpected costs that you haven’t budgeted for, like home or auto repairs, or veterinary bills for a pet. Yes, you’ll be taxed on those kind of withdrawals, but it’d be no different than pulling funds from your 401(k) for the same purpose.

Where Can I Open an HSA With an Investment Account?

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Several HSA providers offer the ability to invest your HSA money. Our top picks come from Fidelity because the company offers the best options for self-directed investors. We cover more about Fidelity’s HSA offerings below.

Fidelity HSA

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• Available: Sign up here
• Debit card: Yes
• Insured: Yes (Uninvested cash is insured)
• Minimum balance: $0
• Minimum to invest: $0 for Fidelity HSA, $10 for Fidelity Go HSA
• Investment options: Stocks, bonds, mutual funds, ETFs (investments depend on account type)

Fidelity offers two options for HSA accounts: the Fidelity HSA or the Fidelity Go HSA. The self-directed Fidelity HSA is best for people who prefer to handle their own investments. With this account, you can invest in stocks, bonds, mutual funds, and ETFs. It’s also a rarity in that it allows you to buy fractional shares of stock. You’ll also benefit from commission-free trades, minimal fees, and no account minimums. This HSA account also comes with a debit card that you can use for qualifying healthcare expenses. These features make the Fidelity HSA a good option for those seeking the flexibility of a self-directed account, as well as individuals or families who might not have a ton of extra cash to set aside for healthcare expenses. People seeking a managed account could opt for the Fidelity Go HSA instead. Funds in a Fidelity Go account are invested in Fidelity Flex mutual funds, which feature no management fees and often no fund expenses. Related: 11 Best Commission-Free Stock Trading Apps & Platforms

Lively HSA

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• Available: Sign up here
• Debit card: Yes
• Insured: Yes (Uninvested cash is insured)
• Minimum balance: $0
• Minimum to invest: $0
• Investment options: Stocks, bonds, mutual funds, ETFs (investments depend on account type)

Lively HSA offers two investment options: a self-directed health savings brokerage account (HSBA) through Schwab and an HSA Guided Portfolio from Devinir. Both accounts can be managed through the Lively mobile app, and both offer an HSA Visa debit card. The self-directed account offers free access, while the managed portfolio has a 0.50% annual account management fee. Those who opt for a self-directed account can choose to invest in stocks, ETFs, mutual funds, bonds, and more, and many trades are commission-free. The Guided Portfolio allows investors to choose from roughly two dozen mutual funds. As its name suggests, the Guided Portfolio offers personalized investment suggestions that align with your risk tolerance. It also offers automatic rebalancing so your investment aligns with your needs and goals. While this account does have an annual fee, its automated features can be useful for those who aren’t interested in a fully self-managed account. Related: 13 Best Stock Picking Services, Subscriptions, Advisors & Sites

HSA Bank

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• Available: Sign up here
• Debit card available: Yes
• Insured: Not disclosed
• Minimum balance: $0
• Minimum to invest: $1,000
• Investment options: Stocks, bonds, mutual funds, ETFs (investments depend on account type)

Initially established as State Bank of Howards Grove in 1913, health savings account administrator HSA Bank has been focused exclusively on providing HSAs to its members since 2004. Its health savings accounts come with minimal fees, and like Lively, it offers two investment options: a self-directed brokerage account through TD Ameritrade or a guided portfolio from Devinir. Through TD Ameritrade, account holders can choose to invest in stocks, bonds, ETFs, and mutual funds. With Devinir, you can invest in a select group of no-load mutual funds and take advantage of automatic rebalancing. Maintenance fees for the savings portion of the account are variable, though these fees typically can be avoided by maintaining some hold of minimum balance in your HSA Bank cash account that varies by employer plan. Related: 20 Best Stock Research & Analysis Apps, Tools and Sites

Other FAQs on Using Health Savings Accounts for Retirement

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Can I contribute to an HSA after I retire?

Your retirement status has no bearing on whether you can contribute to an HSA. However, you must have a high-deductible health plan (HDHP) to contribute to an HSA, so if you enroll in Medicare, you’ll automatically be disqualified from continuing to contribute to an HSA. (But you can still withdraw from any HSA funds you’ve accumulated.) So, if you retire early, for instance, you can continue contributing to an HSA as long as you’re not yet enrolled in Medicare, you’re covered on a high-deductible health plan, and you’re not someone’s tax dependent.

How does an HSA compare to an FSA?

Health savings accounts (HSAs) are different from flexible spending accounts (FSAs) in several ways. For one, you can carry over your HSA funds from one year to the next, whereas FSA contributions must be spent each year, or you’ll lose them. Also, HSAs are employee-owned, whereas FSAs are company-owned; if you leave a job, you can take your HSA funds with you, but you’ll lose your FSA funds if you don’t spend them before you’re terminated. For both these reasons, there’s no feasible way to use your FSA funds in retirement, whereas HSA funds can and often are used in retirement.

	HSA	FSA
Who owns it?	Employee or individual	Employer
Do funds carry over?	Yes	No
What are max contributions in 2023?	$3,850 for individuals	$3,050 for individuals
	$7,750 for families	N/A
Can you take the account with you if you leave your job?	Yes	No
What is the tax treatment?	Contributions are pre-tax (if made by employer) or tax-deductible (if made by employee)	Contributions are pre-tax
HDHP required?	Yes	No, but a regular health plan is required

What other retirement accounts can I use for retirement planning?

Multiple accounts can be used for retirement planning and tax diversification, including the following.

Individual retirement account (IRA)

As its name suggests, an individual retirement account (IRA) is an account that’s not employer-sponsored. You can choose either a traditional or Roth IRA, which have different tax advantages. When you contribute to a traditional IRA, your contributions may be tax-deductible in the current year and distributions are taxed in retirement. With a Roth IRA, you won’t get the benefit of a current-year income tax deduction, but you’ll get tax-free withdrawals in retirement.

Employer-sponsored plan

Employer-sponsored plans may include traditional or Roth 401(k)s, 457(b)s, or 403(b)s. Tax treatment varies depending on the account’s structure, and you might or might not need to pay taxes on distributions in retirement.

Pensions

With a pension, your employer sets aside money that’s invested and then paid back out to you in retirement. They’re increasingly rare in this day and age, mostly giving way to 401(k)s and other employer-sponsored plans. But for now, they’re still around.

What are qualified medical expenses?

The IRS has a comprehensive list of what’s considered a qualified medical expense. But these qualified costs run the gamut, from prescription and over-the-counter medications to eyeglasses and dentures to medical devices to addiction treatment. The list is pretty long, so chances are if you’d like to use HSA funds for covering medical expenses, they’re probably qualified medical costs. (Just be sure to double-check before you withdraw any money from your health savings account.)

Is it better to save in an HSA or 401(k)?

An HSA and 401(k) are similar in that both act as retirement accounts where withdrawals are taxed, but without additional penalty, at a certain point—at age 65 for HSAs, at age 59½ for 401(k)s. HSAs have an additional “healthcare kicker” in that you can withdraw tax-free to spend on qualified medical expenses. Also, depending on the account, an HSA might have more investing options than a 401(k). A 401(k), however, has a much higher contribution limit. For 2023, annual HSA contribution limits are $3,850 for individuals and $7,750 for families; you can contribute up to $22,500 in a 401(k) ($30,000 if you’re at least 50 years old). For 2024, annual HSA contribution limits are $4,150 for individuals and $8,300 for families while 401(k) contribution limits for individuals are $23,000 ($30,500 for those 50 and older). Contributing to both accounts can be advantageous if you’re looking to maximize your retirement income.

Can you contribute to an HSA if you are collecting Social Security?

Whether you can contribute to an HSA isn’t directly tied to whether you’re collecting Social Security. However, if you collect Social Security benefits, the Social Security Administration automatically enrolls you in Medicare Parts A and B. Thus, you don’t have a high-deductible health plan, thus you cannot contribute to an HSA. If you’re not 100% sure about how your situation applies to contributing to an HSA and what that means for Uncle Sam’s cut, please seek out tax advice from a professional. Related

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