HSAs: the Ultimate Retirement Account?

Nov. 10, 2022

Key Takeaways

  1. Health Savings Accounts (HSAs) are well known for their “triple threat” tax advantage, but do you know about all the other benefits one can provide?
  2. For those with good health, many experts believe an HSA is the first account you should maximize in saving for retirement.

HSA Basics

HSAs are primarily used to set aside pre-tax money to use towards HSA eligible medical expenses. They were created in 2003 as a way to combat rising health care costs for those with High Deductible Health Plans (HDHPs). To be considered a HDHP in 2022, a health plan’s annual deductible must be at least $1,400 for self-only plans or $2,800 for a family plan (two or more individuals covered). Anyone enrolled in a HDHP can open an HSA, either through your employer, or, if your employer doesn’t offer one, on your own.

Those with a self-only health plan can contribute up to $3,650 and those with a family plan can contribute up to $7,300, for tax year 2022. These amounts are set to increase to $3,850 and $7,750, respectively, for tax year 2023. Individuals aged 55 or older are allowed to make annual catch-up contributions of $1,000, too. A slightly higher age than when catch-up contributions for most retirement accounts begin (age 50).

The HSA “Triple Threat”

You may have heard of a HSA’s “triple threat” tax advantage; a benefit no other retirement account can match:

  1. Contributions are pre-tax so you can deduct them from income
  2. Assets grow tax-deferred
  3. Distributions are tax-free if used for HSA eligible expenses

The list of HSA eligible expenses is extensive, from classic expenses like check-ups and x-rays, all the way to dental care, hearings aids, long-term care insurance premiums, and even Medicare premiums. New expenses are added regularly so it’s a good habit to stay up to date on what qualifies.

A Supercharged Retirement Account

Now that we’ve covered the basics, here are the additional benefits that really take these accounts to the next level and make them so powerful.

  1. There is no time limit on distributions for eligible expenses. For example, once you establish a HSA, you can pay for medical expenses out of pocket and reimburse yourself 20 or 30 years later. Therefore, you can let the assets grow tax-deferred for as long as possible, letting the power of time and compounding work their magic, and take distributions when you need them. Be sure to keep accurate records of past expenses paid out of pocket in case the IRS comes asking questions.
  2. Not only are contributions tax deductible for income tax purposes, but contributions made directly through payroll (i.e., taken out of your paycheck) avoid the 7.65% FICA tax (i.e., Social Security and Medicare tax). Most other retirement account contributions are made after you pay FICA taxes.
  3. You can make penalty-free withdrawals, for any reason, after age 65 and you are only on the hook for income taxes on the distributions. The penalty is 20% for non-eligible withdrawals before age 65.
  4. There are no required minimums distributions so assets can grow tax-deferred for as long as possible. However, since HSAs left to anyone other than your spouse are fully taxable the year of your death, it’s recommended you withdraw all the assets in your lifetime.
  5. Once you exceed a certain dollar threshold in your account, typically $1,000 or $2,000, you can invest the assets above this threshold. Most HSA providers include an investment option, though not all, so it’s important to research best HSA providers before opening an account.
  6. Unlike Roth IRAs, you don’t need earned income to make a contribution and there are no income limits to worry about.
  7. Like traditional IRAs, the account belongs to you so you can take it with you. But unlike traditional IRAs, your employer can contribute to your HSA.

Not everyone has access to a Health Savings Accounts, but for those that do have access and don’t foresee substantial medical expenses in their or their family’s future, you may want to put it at the top of your retirement savings list (after you capture your company match, of course). Please feel free to schedule a call with a Financial Consultant to discuss how an HSA might fit into your retirement plans.

This information is not intended to be tax advice. We suggest you discuss you or your family’s specific tax issues with a qualified tax advisor.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.

Want regular insights into financial planning and investing-related topics?



Sign up to receive the latest financial planning and investment tips and news.

View all Preferences