The Health Savings Account (HSA) was designed to help taxpayers with high-deductible health insurance save for medical expenses, but it can also be a powerful retirement planning tool. With its trifecta of tax advantages — 1) pretax contributions, 2) tax-deferred growth, and 3) tax-free withdrawals for qualified medical expenses — plus a special rule for taxpayers age 65 and older, an HSA can complement and even supplement traditional retirement savings.
Case Study: Building Up an HSA as a Retirement Asset Suppose Morgan, age 45, contributes the maximum 2025 individual limit of $4,300 to an HSA each year. Starting at age 55, Morgan also makes the $1,000 catch-up contribution annually. Morgan spends $500 per year on medical expenses and invests the rest, earning an average annual return of 5%. Here's a summary of Morgan's HSA activity:
Based on these assumptions, after 20 years, Morgan's HSA could grow to approximately $145,000! That's $145,000 in tax-advantaged savings available at age 65 to help Morgan fund expenses during retirement. Morgan can take tax-free distributions for qualified medical expenses, and nonmedical withdrawals will be taxed penalty-free as ordinary income — just like distributions from a traditional IRA, but without any required minimum distributions. Note: If HSA contribution limits increase in future years due to inflation (as they have historically) and Morgan contributes the full amount each year, the ending balance could be even higher. This example is for illustrative purposes only and doesn't guarantee future results.
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How HSAs Work
To be eligible to contribute to an HSA in 2025, you must:
- Be enrolled in a high-deductible health plan (HDHP) with a minimum deductible of $1,650 for self-only coverage ($3,300 for family coverage),
- Have no other health coverage, except for certain permitted insurance types,
- Not be enrolled in Medicare, and
- Not be claimed as a dependent on someone else's tax return.
For 2025, the contribution limits are as follows:
- $4,300 for individual HDHP coverage, and
- $8,550 for family HDHP coverage.
If you're age 55 or older, you can make an additional $1,000 "catch-up" contribution.
Contributions reduce taxable income — either as pretax salary deferrals through an employer-sponsored HSA or as an above-the-line tax deduction if you set up the HSA yourself. (You can claim above-the-line deductions on top of the standard deduction; you don't have to itemize deductions.)
The HSA funds can be invested, growing tax-deferred (potentially tax-free) over time. You can carry over an HSA balance from year to year indefinitely, unlike a Flexible Spending Account balance.
HSA withdrawals for qualified medical expenses are tax-free. Withdrawals not used for such expenses will be taxable at your ordinary-income rate and, generally, subject to a 20% penalty. But, if you're age 65 or older, the penalty is waived.
If in the future you switch from an HDHP to a lower-deductible plan — and when you enroll in Medicare — you'll no longer be eligible to contribute to your HSA. But you'll still be able to take tax-free withdrawals from it for qualified medical expenses.
Retirement Funding
Here's how an HSA can help fund your retirement:
1. Pay for qualified medical expenses. Medical expenses typically increase with age, and Medicare doesn't cover everything. During retirement, you can use your HSA to cover out-of-pocket medical costs, Medicare premiums (except Medigap) and long-term care expenses. Because withdrawals for qualified medical expenses are tax-free, this is the most tax-efficient way to use your HSA funds. The HSA can continue to grow tax-deferred during your life, until the account is depleted.
If you're married, consider naming your spouse as the account's beneficiary. Why? If your HSA isn't depleted during your lifetime, your surviving spouse designated beneficiary can take tax-free withdrawals from the inherited account to pay his or her qualified medical expenses. And the HSA funds can continue to grow tax-deferred through the surviving spouse's life or until the account is depleted.
An HSA can also be a valuable health care funding tool if you retire before Medicare eligibility at age 65. It can help you cover qualified medical expenses without tapping into retirement accounts. But be aware that you generally can't take tax-free HSA withdrawals to pay for health insurance premiums unless you're paying for COBRA coverage.
2. Supplement your retirement income. Once you turn 65, HSA withdrawals not for qualified medical expenses are subject only to regular income tax — just like distributions from a traditional IRA or 401(k). The 20% penalty won't apply. So your HSA can serve as a backup to your traditional retirement plan.
An HSA even has an advantage over certain retirement accounts: Unlike traditional retirement accounts, HSAs never require you, as the original account owner, to take annual required minimum distributions (RMDs). This allows you to put off withdrawals as long as you like, letting the funds continue to grow tax-deferred.
Important: If you name an HSA beneficiary other than your spouse, the account's fair market value as of the date of death will be included in the beneficiary's taxable income. The beneficiary doesn't have the option to spread the distributions (and the associated tax liability) over 10 years, as can be done with most retirement accounts.
Valuable Opportunity for Higher-Income Taxpayers
Many higher-income taxpayers are already maxing out contributions to their retirement accounts for 2025:
- The 401(k) contribution limit is $23,000 ($30,500 for those age 50 and older; $34,750 for those age 60, 61, 62 or 63).
- The IRA contribution limit is $7,000 ($8,000 for those age 50 and older) — and many higher-income taxpayers can't deduct these contributions.
These limits can leave high earners looking for additional tax-advantaged savings options. This is where an HSA can play a valuable role. Its tax-advantaged treatment plus no penalty for post-age 65 distributions and lack of RMDs make HSAs an attractive tool for building long-term, tax-efficient wealth.
There's no income limit for making HSA contributions (unlike Roth IRAs and, generally, deductible IRA contributions), and HSA contributions reduce taxable income while offering investment growth potential. For those already maxing out 401(k)s and IRAs, an HSA provides one of the few remaining ways to set aside additional money for retirement while enjoying tax benefits.
Making the Most of an HSA
To get the maximum benefit from your HSA, consider these strategies:
Contribute the maximum each year. Maxing out contributions ensures you get the full tax benefits while building a larger nest egg for health care costs and retirement.
Invest HSA funds. Many HSA providers offer investment options similar to retirement accounts. Investing HSA funds can lead to long-term growth, increasing the funds available later in life. (Of course, you also must consider the market risk that comes with investing.)
Save receipts for reimbursement later. HSAs have no time limit on reimbursement. You can pay for medical expenses out of pocket now, allow your HSA funds to grow, and reimburse yourself years later tax-free.
The Right HSA Strategy for You
An HSA is more than just a way to pay for medical expenses — it's a versatile tool that can enhance retirement planning. You can enjoy tax savings today while preparing for future health care and retirement needs. Your CPA can help you determine the best HSA strategy based on your financial goals and tax situation.