Using Your HSA Account as A Retirement Account


hsa accountAs the price of insurance continues to increase, Health Savings Accounts (or HSA’s) are becoming more and more popular. An HSA account works by combining a savings account with a high deductible insurance plan, which means you will have a higher deductible (out of pocket cost) for health insurance coverage. But did you know that you can effectively use you HSA account as a retirement account?

Benefits Of An HSA Account

The main benefit of an HSA account is that the money you put into the account is pre-tax, meaning you don’t pay tax on it. It’s the same concept behind the 401k. So, if you are having money taken out of your paycheck to fund your HSA account, the money will come out before taxes.

On the other hand, if you are funding your HSA account with money not from your paycheck, the money you contribute will be accounted for on your taxes for the year, reducing your taxable income. (One note to this: when you make a contribution to your HSA account from your paycheck, the contribution is not taxed on any level. When you make the contribution out of pocket, you will get to write that contribution off on your federal taxes. However, you will still have paid FICA and Medicare taxes on that money. Therefore, it is best to contribute to an HSA account directly from your paycheck.)

What makes an HSA account ideal is that if you use the money in your HSA for medical expenses, the money taken out is tax-free. Therefore, you can put money in pre-tax and avoid tax on the back end when it is used for medical expenses. Where else can you avoid tax completely?

Of course, there are limits to how much you can put into your HSA account each year. For 2015, individuals can contribute $3,350 and families can contribute $6,650. Those 55 and older can contribute an additional $1,000 to those numbers.

Using Your HSA Account As A Retirement Account

When I first started with my HSA account, I used the money I was saving in my HSA for medical expenses, taking advantage of the tax-free treatment of money. But then I got to thinking about how to better use my HSA. After doing some research, I realized that many others were doing exactly what I was thinking: using my HSA account as a retirement account!

Instead of putting money into my HSA each month and then using it on medical expenses now, why not put the money into my HSA account and not use it for my medical expenses? I would use out of pocket money to pay for my medical expenses. The benefit of this was simple: I invest my money now pre-tax and let it grow over the next 40 years (HSA’s allow for you to invest the money in your account).

When I retire and have more health related expenses, I can use the money I saved to pay for those medical bills and the money I take out will be tax free! Basically, it will work like a Super Roth IRA for me. I invest pre-tax, let the money grow over the course of 35-40 years, then withdraw it tax-free.

Notes For Using Your HSA Account As A Retirement Account

Some readers will point out that we don’t know what the future holds and the tax-free nature of distributions from an HSA account could be changed. I agree with that. But, the change will never be implemented overnight. There will be a window where you can still use your HSA money tax-free. Or, any money you have in the plan could be “grandfathtered” in meaning only new money will be taxed.

Additionally, even if taxes are introduced, if you hold off until retirement to use the money, the money you invested will be worth much more and you could be in a lower tax bracket, off-setting most if not all of the tax you would pay.

Final Thoughts

The HSA is a great tool for saving money on health care expenses, but what’s better is using your HSA as a retirement account to supplement your retirement savings. I highly recommend looking into it to see how you may benefit from it. For your convenience, I compiled a list of eligible HSA expenses so you aren’t caught off-guard as to what you can use the money in your account for tax-free.

Finally, if you have any confusion over health care (it is confusing after all, check out my complete guide to understanding health insurance. Don’t worry, it’s a fun read.)

Readers, what are your thoughts on using your HSA account as a retirement account?

7 thoughts on “Using Your HSA Account as A Retirement Account”

  1. That's a very savvy tax move. I never thought of the possibility of using an HSA that way. Now that I am self employed though I wonder if there is a similar plan for self employed individuals?

    1. My understanding is that you can contribute to an HSA as a self employed person. I would suggest you check out the IRS website.

  2. My work doesn't offer an HSA except to the owners of the company. But you give me tax advantaged accounts and I'll fill them all up. I'm not a tax speculator, so if it changes at some point then I'll adjust. For now, I'll fill up all the Roths I can get my hands on (except not yours, sorry, haha, just my wife's and mine…) plus my 401(k).

    Sure you don't know where taxes are going but I think some people use that as an excuse not to save. Just save.

    1. I agree. We don't know what taxes will be in the future. They could be higher or they could be lower. Just focus on the now and save all that you can and make adjustments as tax laws dictate.

  3. This is an old article but maybe this comment will find you. 🙂

    Can you expound on this part “(HSA’s allow for you to invest the money in your account)”… where/how can you invest that?


    1. Most HSA accounts are simply like a bank savings account and many have an investment option tied to them. If you can’t find yours, it’s best to ask. The investment option will allow you to transfer some of the money in the savings account into some mutual funds. Many charge all kinds of fees, so you have to keep an eye out for that.

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