Health Savings Accounts for Retirement

If you have the chance to open a Health Savings Account (HSA), you might want to take a look. An HSA is a tax-advantaged account that you can use to pay for qualified medical expenses.

Many people retire before age 65, the age of Medicare eligibility. If you retire before age 65 and have funded an HSA, you can utilize your HSA balance to help pay for any out-of-pocket medical and hospital costs. While you can’t contribute to an HSA after becoming a Medicare beneficiary, you can use your HSA assets to reimburse yourself for Medicare premiums. You can also draw on your HSA to help pay other senior healthcare costs: at-home health care, nursing home care, and even eldercare insurance premiums.

To qualify for an HSA, you must have no other health insurance other than a high-deductible health plan. You can’t be claimed as a dependent on someone else’s tax return, and you can’t be eligible for Medicare yet. 

To make pre-tax contributions to an HSA, you must enroll in an employer’s High Deductible Health Plan (HDHP). HSA contributions are tax-deferred – this year, the contribution limit is $3,650 for an individual and $7,050 for a family. This is just one of their potential tax advantages. HSA distributions are tax-exempt if you use the money for health care expenses. If you were to withdraw money from your HSA for a non-medical reason, that money becomes taxable income, and you face an additional 20% penalty. Once you turn 65, you can use HSA assets for non-medical purposes without any tax or financial penalty.

Don’t spend your contributions. HSA should be looked at primarily as an investment tool. An HSA’s main goal is to give people with a high-deductible health plan a tax break to make their out-of-pocket medical expenses more manageable. The best way to use an HSA is to use it like an investment tool that can improve your retirement journey.¹