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  • Writer's pictureMark Fonville, CFP®

How to Use an HSA for Retirement

Updated: Jun 17, 2021

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.

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.

Don’t do that!

You won’t get the most bang for your buck by using funds for your sunscreen, instead, let that money grow and compound tax-free. To maximize your health savings account benefits, invest your contributions and allow your money to grow for five, 10, or even 20 years or more. The money will compound tax-free and then you will be able to take it out tax-free for healthcare expenses in the future.

Even though people have the option to invest their HSA funds, less than 7% held their funds in anything other than cash (according to the EBRI).

Again, not investing is a glaring missed opportunity as it can help you pursue larger returns in the long run. While you have several investment options for your HSA funds, it’s often best to do so in diversified mutual funds.

HSAs offer triple tax advantages!

It's worth noting once more just how tax-efficient an HSA can be.

We're passionate about helping you build a proactive and dynamic tax plan—and an HSA could be a great addition to the strategy.

HSAs and Retirement Planning Go Hand In Hand

A health savings account can add significant value to your retirement nest egg.

Reducing taxes in retirement is critical and an HSA can help you do that. While you can no longer actively make contributions once you turn 65, you have access to your HSA funds throughout retirement.

You can use them to help offset or cover the cost of surgeries, dental needs, equipment, prescriptions, caregiving, medical bills, and other ongoing expenses that Medicare doesn't fully cover. Retirees can also use the funds to cover costly Medicare premiums like Part A, B, and D.

A little-known tax strategy is to save all of your healthcare receipts over the next 10 or 15 years.

Then when you retire, you can write yourself a check from your HSA to pay yourself back for all of those healthcare expenses. Even something as simple as this can help you maximize your HSA dollars in retirement. Doing so adds a nice boost to your balance sheet and is just one example of a much more powerful way to use your HSA in retirement.

Healthcare in retirement will be a big line item—nearly 15% of your budget.

Fidelity estimates that a healthy couple will spend about $300,000 (after-tax) on medical costs alone in retirement excluding long-term care needs.

It's essential to plan for your changing health now, which is why it's often best to treat your HSA like a long-term investment, not a short-term piggy bank.

Our financial planning team seeks to help you craft an ironclad retirement plan. Perhaps one of the most effective ways to do that is by paying close attention to your entire financial picture, namely your tax situation.

If you’re wondering how an HSA could help transform your retirement plan, let’s talk about it more together.


About Mark Fonville, CFP®

Mark is the President of Covenant Wealth Advisors and a Certified Financial Planner professional specializing in retirement income planning, tax planning, and investment management.

He has been featured in the New York Times, Barron's, Kiplinger Magazine, and the Chicago Tribune. Learn more



Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.


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