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  • Mark Fonville, CFP®

How to Use an HSA for Retirement


How You Can Use An HSA for Retirement Planning

With healthcare costs on the rise, it's critical to establish a plan to cover medical expenses whether planned or unexpected.

Knowing how to use an HSA for retirement can be a critical piece to reducing taxes and paying for healthcare costs.


But, most people use an HSA account incorrectly, thus throwing money down the drain.

When it comes to achieving your goals in retirement, tax efficiency is the name of the game.


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Here's how to use an HSA for retirement planning and tax reduction.


What's An HSA?


A health savings account (HSA) is a savings/investment vehicle designed to help cover medical costs. HSAs are one of the most tax-efficient savings mechanisms available because they offer triple tax benefits:

  1. Contributions are pre-tax,

  2. Gains/earnings grow tax-free, and

  3. Qualified medical expenses remain tax-free.

When used properly, an HSA can truly be a tax-free solution, making it an excellent savings vehicle alongside your 401(k), IRA, and Roth IRA. Qualified expenses vary from plan to plan but tend to include copays, prescriptions, physical therapy, surgery, and more.

Should you make a non-qualified distribution, you could face a 20% penalty and get stuck with paying ordinary income tax on the distribution. An unqualified distribution of $1,000 assuming a 24% tax bracket would leave you with about $440 in taxes and fees—not something you want to worry about.

Another great benefit is that HSAs don't carry required minimum distributions. You are free to use the money (in a qualified manner) as you see fit.


In 2021, the contribution limit is $3,600 for individuals or $7,200 for family coverage. Those 55 and older can add an extra $1,000 in catch-up contributions. Your employer may also make HSA contributions.

The best part?

Employer contributions don’t count toward your taxable income!

How Can You Enroll In An HSA?


You must be enrolled in a high-deductible health plan (HDHP) to establish an HSA. The IRS sets certain parameters to determine if a plan can be considered high-deductible.


Here are the 2021 numbers. The minimum deductible is $1,400 for an individual and $2,800 for family coverage. The maximum deductible is $7,000 for an individual and $14,000 for family coverage.


Most people enroll through their employer, but if you have an HDHP, you can also shop on the open market. There are a few other eligibility requirements to keep in mind.

  • You can’t contribute to an HSA over 65.

  • You also aren’t able to contribute if you are enrolled in Medicare.

  • You’re ineligible if you’re claimed as a dependent on someone else’s tax return.

  • You can’t have any other health coverage (under most circumstances).

Fundamental HSA Features


Funds roll over year to year (unlike flexible spending accounts FSA) making HSAs a wonderful long-term planning companion. You also have the option to invest your HSA funds, offering the greater potential to grow and compound savings year to year.


Many people overlook this feature and end up using their HSAs in ineffectual ways.


Data from the Employee Benefit Research Institute (EBRI) showed that the average HSA account balance was $3,221 in 2019. It also found that 60% of account holders took withdrawals, further highlighting the prevalence of short-term as opposed to long-term saving.

Typically, people fund their HSA with pretax dollars and then use the money saved for medical expenses in the same year of funding.