Can You Use Your HSA For Retirement?

by: Russ Thornton

As we age, it’s inevitable that our medical expenses will increase. I wish this wasn’t the case, but no matter how healthy we are, life happens, our bodies don’t hold up as well to our traditional routines as we age, and we end up at the doctor more often. While this is completely normal, it also makes setting up a budget for retirement tough. It’s difficult to estimate what our future medical costs will be.

In some cases, it’s possible to look at your aging family members and pick up on future potential medical problems you may face and prepare accordingly, but other times we’re faced with the unthinkable – an accident, the need for long-term care, or an unexpected surgery that’s more expensive than we anticipated. Luckily, you can start saving for these medical costs (anticipated or not) now using a Health Savings Account.

What is an HSA?

A Health Savings Account (HSA) is a savings account specifically intended for qualified medical expenses. These qualified medical expenses cover a multitude of categories, including:

  • Acupuncture
  • Eyeglasses (and eye exams/surgery)
  • Guide dog (or other service animals)
  • Lab fees
  • Lifetime care (advance payments)
  • Nursing home
  • Organ donors
  • Oxygen
  • Physical exams
  • Prosthesis
  • Psychoanalysis (in some cases)
  • Wheelchair
  • X-rays

And that’s just a small sampling of expenses that qualify. All contributions to an HSA are pre-tax, meaning you’re decreasing your taxable income and still saving for future medical costs. You can start using these funds whenever you want to, but you also don’t have to use them right away. Contributions roll over from year to year, so even if you don’t need them right now, you can always use them later (like during retirement, when medical expenses might be higher).

Who Can Open an HSA?

People who have a High Deductible Health Plan (HDHP) can open an HSA. The two are inextricably connected, so unless you have HDHP insurance coverage, you may not be able to use an HSA as part of your retirement savings strategy. You also can’t open an HSA if you’re eligible for Medicare. However, it’s also important to realize that you own your HSA. Although many people receive health insurance coverage through their employer and open an HSA through them as well, the employer doesn’t own the account. This means that if you choose to leave the organization, you can take the money with you (which isn’t the case for similar accounts – like a Flexible Spending Account).

What Do Contributions Look Like?

In 2018, there’s an annual contribution limit of $3,450. If your insurance coverage extends to your entire family, you can contribute up to $6,900 each year. Like many tax-sheltered savings accounts, there is also a “catch up” contribution limit. If you’re age 55 or older, you can contribute an additional $1,000 to the account. Contributions to your HSA are pre-tax, and any money you spend on qualified medical expenses from your HSA aren’t taxed. However, if you use your HSA for non-qualifying expenses (medical or not), the funds you used will be taxed next filing season, and you’ll owe a 20% penalty.

Can You Invest Your HSA Savings?

Yes! Few people realize that you can invest the funds in your HSA for added growth. Even using conservative estimates, and small monthly contributions, your funds can still grow a notable amount before you turn 65 and qualify for Medicare. If you’re interested in estimating what the growth rate might be, try using a HSA calculator like this one.

Tax-Sheltered Savings

While many people use their HSA for medical expenses right now, it often makes more sense to hold off on spending the funds if you can and save the money for medical expenses in retirement. The tax-sheltered element of your HSA savings is tough to beat, and leveraging this account as you start creating a retirement savings strategy can be incredibly helpful.

If you save these funds for retirement, you can use them (tax-free) for a number of pricey qualifying medical expenses. From hearing aids to Medicare premiums – if you play your cards right, you can use your HSA for all (or at least most) of your medical expenses during retirement. This will help you wring extra life out of your traditional retirement savings, and pursue the retirement lifestyle you’ve always dreamed about.