Using Your Health Savings Account (HSA) in Retirement Planning

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).

An HSA isn’t actually a retirement account; it’s completely different. 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, the money you contribute to an HSA can potentially grow tax free. As long as you use the money for 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 be enrolled in a high-deductible health plan (HDHP) and cannot have any additional health coverage.  HSA-eligible HDHPs are typically provided by most employers.

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

HSA contribution limits for 2023 and 2024

As with any other tax-advantaged account, there are contribution limits. Contribution limits are set by the Internal Revenue Service based in part on cost-of-living factors. For 2023, the individual limit is $3,850, and the limit if you have family health coverage is $7,750. For 2024, the limits increase to $4,150 for individuals and $8,300 for families.

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

Some employers may make HSA contributions for you, similar to how employers make 401(k) or profit-sharing plan contributions. Some employers may match your contribution or provide a flat amount. Even a small HSA contribution may mean your employer will contribute, and this “free” employer money will also be nontaxable, if used for qualifying health expenses.  

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, 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 individual retirement account (IRA).

How to use an HSA for retirement

Using an HSA for retirement isn’t about replacing an IRA or other employer-sponsored retirement benefits. 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 leave the money in where it will hopefully grow year over year. Unlike a flexible spending account (FSA), in which the money doesn’t roll over, HSA money will hopefully continue 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 leave the remaining funds in the account, 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, it’s also possible to strategize when you take out health care money. For example, consider using your regular accounts to pay current health care expenses. 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, after you reach age 65, you can treat HSA funds the same way you would treat those in a traditional IRA. The money can be withdrawn for expenses not related to health care without being charged a penalty, but you’ll still be responsible for taxes.

Ways to invest HSA funds

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

Companies like TD Ameritrade work with HSA providers to give you the chance to invest your HSA funds so they can potentially earn more over time. 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, one of the best features of an HSA is that when a company makes HSA contributions on your behalf, the money is immediately vested. Then 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 exchange-traded funds and mutual funds, as well as other investments. Look for an HSA provider that will meet your needs and works with an investment firm that offers education and a variety of investment products.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different.