Pretty much everyone has heard about 401(k) plans, but beyond these – Health Savings Accounts (HSAs) also can be great retirement vehicles. HSAs are tax-advantaged savings accounts for those with high-deductible health plans (HDHPs). The idea is that since those with HDHPs generally have lower premiums but higher out-of-pocket expenses, they need a way to save for such expenses.

Few eligible taxpayers take full advantage of HSAs. The Employee Benefit Research Institute estimated a few years ago that out of the approximately 17 million people eligible, only about 13.8 million opened HSA accounts, leaving almost 20 percent without one. The survey also revealed that very few people maximize their contributions – and nearly everyone takes current distributions, leaving balances far lower than they could be otherwise.

Why Does This Matter?

The HSA’s tax advantages make it a great way to save for retirement and in some ways it is even better than using a retirement account. For example, you can make tax-deductible contributions either via payroll deductions or on your own; the account grows tax-free on interest, dividends and capital gains; and withdrawals for qualified medical expenses are tax-free. In contrast to a 401(k) or IRA, HSAs do not require withdrawals at a certain age, allowing the account to remain untouched and growing tax-free for the rest of your life. Now let’s look at some considerations to fully take advantage of HSAs.

Max Your Contributions Before It’s Too Late

HSA contributions are only tax-deductible before a certain age; once you qualify for Medicare this tax advantage ends. Once you are eligible for Medicare you technically no longer must have an HDHP and therefore aren’t allowed to make deductible contributions anymore. Once you reach 55 years old, catch-up contributions of an additional $1,000 per year are allowed for each the taxpayer and spouse, if married.

Look at Your HSA as an Investment Tool

While HSAs weren’t intended to be investment accounts, treating it like one is the best way to benefit from the tax advantages. Get in the mindset of treating your HSA contributions as “untouchable,” and pay your medical expenses with money from outside the account.

Aside from maximizing what you put in and taking out as little as possible, you need to invest HSA funds wisely. Consider an investment strategy similar to what you use for other retirement assets, within the context of your entire portfolio.

Also remember that while your employer might make it easy to open your HSA account with a certain administrator or even set you up with a default provider, you ultimately have say over where to keep your HSA money. An HSA is more like an IRA than a 401(k)s in this respect, so look around for a plan that offers high-quality, low-cost investment options.

Maximize Your HSA Assets in Retirement

By waiting until retirement to use your HSA funds, you enable those assets to grow tax free with the potential to use the funds tax free as well. You’ll still will be able to use the funds tax free only for qualified medical expenses, but what qualifies as a medical expense is expansive.

For example, in addition to the typical items, tax-free HSA withdrawals can be used to pay for  portions of the premiums for certain long-term care insurance policies, in-home nursing care, retirement community fees that include certain types of care, and nursing home fees.

Another thing to note is that since there are no required minimum distributions, you’ll never need to worry about being forced to withdraw the money.


HSAs are largely overlooked as investment tools even though their unique tax advantages make them excellent choices. Obviously, you don’t want to hoard HSA funds at the expense of ignoring your health care, but if you have the means to fund your HSA and pay your medical expenses before retirement with other money, you can reap the benefits in years to come. Lastly, keep in mind that these strategies are all based on current federal tax law. While most states follow federal tax law regarding HSAs, not all do.

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