HSA and Retirement: How to Use Your Health Savings Account

Your HSA can be used during retirement. Learning about contribution limits, withdrawal rules and tax implications can help you be strategic in deciding how your HSA might fit into retirement planning.

5 min read
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Key Takeaways

  • An HSA offers a tax-free way to save for health care costs
  • It’s possible to use an HSA as part of your retirement planning
  • Understand the requirements before you get started

When you get ready to retire, there’s a good chance one of your biggest expenses will be health care. Luckily, there are tools you can use to help make the most of your money. If you qualify, you might be able to use a health savings account (HSA) as a sort of “retirement account” to help you continue to grow your wealth.

“An HSA isn’t actually a retirement account; it’s completely different,” said Tom Vipond, emerging products consultant at TD Ameritrade. “However, it is a tax-advantaged savings account that can be used as part of your retirement strategy.”

Here’s what you need to know about using an HSA as part of a retirement strategy.

What Is an HSA?

An HSA is designed to help you save for qualified health care costs. If you qualify for an account, you can receive a tax deduction for the contributions you make. On top of that, when you withdraw money from an HSA to use it for health care costs, the money grows tax-free.

“This is a unicorn account,” said Vipond. “As long as you use the money for the qualified purposes, you don’t ever pay taxes on the money you put in.”

How Do You Qualify for an HSA?

To qualify for an HSA, you need to have a high-deductible health plan (HDHP). If you have an employer, there’s a good chance it has certain plans designated as HSA-eligible. There are some other requirements, including not having other health coverage, that can limit HSA eligibility.

There are no income-based requirements, so anyone who meets the basic requirements can open a health savings account.

Contribution Limits for an HSA

As with any other tax-advantaged account, there are contribution limits. Contribution limits are set by the IRS, based in part on cost-of-living factors. For 2019, the limit for an individual is $3,500, while the limit for a family is $7,000. For 2020, the individual limit will rise $50 to $3,550 and the family limit will rise $100 to $7,100.

Those who are 55 and older can add an extra $1,000 to the account each year as a catch-up contribution.

When Can You Withdraw HSA Funds?

It’s possible to withdraw HSA funds anytime—but you need to be careful about how you use the money. When you withdraw the money and use it for nonqualified expenses, Vipond warned, you’ll pay a penalty—and be taxed on the withdrawal. The only exception is when you reach age 65.

“After age 65, you won’t have to pay the penalty for nonqualified health care expenses, but you’ll still have to pay taxes as you would with a traditional IRA,” said Vipond.

How to Use an HSA for Retirement

Using an HSA for retirement isn’t about replacing an IRA or other employer-sponsored retirement benefits, according to Vipond. Instead, it’s about coordinating your savings in a way that allows you to maximize how you plan retirement with a health savings account.

First of all, you can save money in an HSA for use after retirement. If you plan to work toward maxing out your HSA, you can let the money grow year over year. Unlike a flexible spending account (FSA), in which the money doesn’t roll over, HSA money continues to grow. It’s not a “use it or lose it” plan.

Because you don’t have to use up all the funds each year, you can let remaining funds grow, with the intention of using the HSA in retirement for health care expenses. Your HSA money can be used for certain premium payments (such as Medicare) and other health care costs.

However, Vipond pointed out, it’s also possible to strategize when you take out health care money.

“Consider using your regular accounts to pay current health care expenses,” Vipond said. “Save all your receipts until you’re in retirement or need the money. Then you can withdraw the money all at once, based on your previous health care spending.”

Because you can withdraw money spent on health care without penalty and without paying taxes, this can be one way to help if you’re planning to retire early and can’t start withdrawing for a traditional IRA or 401(k) until age 59 ½.

Finally, Vipond pointed out that you can also use an HSA as a traditional IRA after you reach age 65. “This is more of a last resort, in a worst-case scenario,” he said. “You can withdraw the money for expenses not related to health care without being charged a penalty, but you’ll still be responsible for taxes.”

How to Invest HSA Funds

No matter how you include an HSA in your retirement strategy, Vipond said it can be a good idea to invest your HSA money in some cases.

“Companies like TD Ameritrade partner with HSA providers to give you the chance to invest your HSA funds so they grow more efficiently over time,” Vipond pointed out. “If your employer’s provider doesn’t offer the opportunity to invest or has limited investment choices available, it’s possible to open your own HSA and move the money.”

In fact, Vipond said that one of the best features of an HSA is its portability. When a company makes HSA contributions on your behalf, the money is immediately vested, and you can use it immediately for health care costs or move it into an account you have more control over.

“Because there are contribution limits, it’s important to look for flexible access to diverse investment choices, such as ETFs and mutual funds, as well as low fees” said Vipond. “Look for an HSA provider that will meet your needs and partners with an investment firm that offers education so you can make the most of your money.”

How HSAs Could Help Your Retirement Savings

Miranda Marquit is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.


Key Takeaways

  • An HSA offers a tax-free way to save for health care costs
  • It’s possible to use an HSA as part of your retirement planning
  • Understand the requirements before you get started

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