When you think of finances and retirement, what immediately comes to mind? Popular retirement vehicles typically include Social Security benefits, a 401(k), an IRA, and investments like mutual funds or stock options. There is another retirement tool that many people overlook – the Health Savings Account or HSA.
At first glance, this may seem confusing. What does an account used for healthcare needs have to do with retirement?
While HSAs are primarily used for qualified healthcare expenses such as copays, prescriptions, over-the-counter medicines, medical devices, and other approved services and health-related costs, they offer a bevy of benefits that can set you up for financial flexibility when you decide to exit the workforce.
Find out why investing in an HSA as a retirement tool is worth your time and money.
HSAs as a Retirement Tool
The first step toward opening a Health Savings Account is enrolling in a high deductible health plan (HDHP) through your employer or on the open insurance market. An HDHP allows you to open an HSA, which you can keep for life, even if you switch health insurance coverage at a later date. Plus, you can use the money regardless of your insurance enrollment status. At the end of each calendar year, all unused funds in the account roll over; there is no risk of “use it or lose it.”
About 75% of employers offer HDHPs and HSAs through their benefits plan, and many contribute to their employees’ accounts. If your company does not offer an HDHP with an HSA, you can enroll in an HDHP on the open insurance market, which allows you to open an HSA with a participating financial institution.
Despite showing year-over-year growth (there were an estimated 26 million HSAs open at the end of 2023), many people are not taking advantage of this opportunity.
Just over one-third (34%) of employees with access to an HSA have enrolled in the benefit, and only 24% of those who have enrolled have gone on to fund their accounts, according to MetLife’s U.S. Employee Benefits Trends Study conducted in September 2024.
Retirement with an HSA
Planning for retirement is not easy. You have to consider many things, including the cost of healthcare. Some estimates show that a 65-year-old retiree can expect to spend an average of $157,500 on healthcare throughout their retirement years. Once you enroll in an HSA, you have growth and spending options that could make those golden years more financially flexible.
The triple tax advantage makes an HSA worthwhile, regardless of your age:
- Tax-free contributions
- Tax-free withdrawals for qualified expenses
- Tax-free interest and investment earnings
With tax-free contributions and earnings, your HSA balance can grow quickly, allowing owners to cover health-related out-of-pocket costs. Plus, you can use the account funds to cover most medical expenses for you and your dependents without being taxed or penalized.
Growing Your HSA Balance
You can invest your HSA balance and grow earnings tax-free at any age. Remember that some HSA providers require a minimum account balance before you can begin investing.
In addition, as you approach retirement at age 55, you can further accelerate account growth by making “catch-up contributions” at $1,000 per year over the annual limit.
Plus, unlike an IRA, HSAs have no requirements around minimum distributions. This allows the account to continue growing until those dollars are withdrawn.
Spending Your HSA Funds in Retirement
For healthcare spending, nothing changes. At age 65, you can continue to use the HSA balance tax-free for eligible medical expenses, giving you the ability to save your retirement funds for other necessities.
For other financial needs, you get some additional freedom. Should the unexpected occur and you need to dip into your HSA for non-eligible expenses, you can also do that. After age 65, you are allowed to make withdrawals for any reason without a penalty. However, you will be taxed on the funds if they’re used for non-eligible expenses.
Financial expert Suze Orman stresses that owners should not rely on their HSA to replace other accounts, like a 401(k) or IRA. Instead, they should be used as a complimentary account to maximize your retirement spending strategically.
HSAs and Medicare
The list of eligible expenses goes beyond medications and doctor visits. When you enroll in Medicare, typically around age 65, your HSA can cover Medicare deductibles, co-pays, and co-insurance. It can also pay for Medicare Parts B, D, and Medicare Part C premiums.
Medigap premiums do not count as a qualified HSA expense.
Start Now with Your HSA
Your HSA could be an avenue for greater financial freedom when you retire. With multiple tax benefits on account spending and growth, HSAs provide flexibility for whatever comes your way. Maximizing your contributions, investing your available balance, and spending those funds strategically can help you prepare for the future.
If you’re already enrolled in an HDHP, opening an HSA account is easy and can be done anytime. Contact your benefits administrator today to learn more.
For 40 years, DataPath has been a pivotal force in the employee benefits, financial services, and insurance industries. The company’s flagship DataPath Summit platform offers an integrated solution for managing CDH, HSA, Well-Being, Commuter/Transit, COBRA, and Billing. Through its partnership with Accelergent Growth Solutions, DataPath also offers expert BPO services, automation, outsourced customer service call center, and award-winning marketing services.