Retirement Savings: 3 Ways To Use Your HSA in Retirement

HSA Health Savings Account Wooden Blocks Near Stethoscope On Wooden Table.
AndreyPopov / Getty Images/iStockphoto

Health savings accounts aren’t nearly as popular as their more well-known counterparts like IRAs and 401(k) plans. Although their stated purposes are different — an HSA is supposed to help you pay your healthcare expenses, while IRAs and 401(k) plans are retirement accounts — they actually work in a fairly similar manner. All of these accounts allow for tax-deductible contributions, tax-deferred growth and, in some specific cases, tax-free distributions. So, what are the ways that you can use your HSA in retirement? Here are the three most important.

Use It as It Was Intended: To Help Pay Your Health Expenses

Generally speaking, it’s best to use accounts as they are intended. This is certainly true in the case of an HSA, which can be a triple tax-free account when used properly. First, contributions to your HSA are tax-deductible. Interest or earnings in your account are also tax-free. Lastly, if you withdraw funds from your HSA to pay for qualified medical expenses, you won’t pay tax on those distributions either. This can be a big boost in retirement, as Medicare and even private insurance won’t always cover all your medical expenses. Plus, the IRS definition of “qualified medical expenses” is fairly broad, ranging from hand sanitizer and aspirin to vision care and X-rays, among many others.

Use It Creatively: As a Supplemental Retirement Account

Health savings accounts weren’t originally conceived of as retirement accounts. However, they can function admirably in that capacity, with a few caveats. Although you can withdraw money from your HSA tax-free if it’s used for qualifying medical expenses, this doesn’t mean that you aren’t allowed to use it for other purposes. At any time, you can take money out of your HSA and use it to pay for anything you want. However, you’ll pay ordinary income tax on your distributions, and if you’re under 65, you’ll also owe an additional 20% penalty tax. This makes using an HSA for other than its intended purposes costly. However, if you’re 65 or older — or disabled — that 20% penalty vanishes, and you’ll only pay income tax on your withdrawals. In that sense, your HSA can operate just like a traditional IRA in some scenarios.

Are You Retirement Ready?

You might have to shop around a bit to find a willing provider, but some HSAs allow a wide variety of investment options, making them more IRA- and 401(k)-like. For example, you may be able to select from a number of different mutual funds or ETFs to invest your HSA funds, or you may simply be allowed to self-direct your entire account, investing it as you wish. While more traditional HSAs only offer a savings account-type option, more and more providers are offering investment options as well. This makes the HSA an increasingly more viable candidate as a retirement-planning vehicle. 

Use It as an Estate Planning Device

Another way that an HSA is like an IRA is that you can choose your beneficiaries for the account. Upon your death, your HSA will pass to whomever you choose. If your beneficiary is your spouse, he or she will receive your HSA tax-free, with no distribution required. If you choose a non-spousal beneficiary, the account must be paid out to them in the year that you pass in the form of a taxable distribution. The same is true if you name your estate as your beneficiary. This means that from an estate planning perspective, it makes the most sense to designate your spouse as the beneficiary of your HSA. 

Don’t Forget the Rules To Qualify For an HSA

The tax benefits alone make an HSA an exceptional account to have. However, one of the reasons they aren’t as popular as IRAs or other tax-advantaged accounts is that not everyone can qualify for one. You cannot open an HSA unless you participate in a high-deductible health insurance plan, defined by the IRS as having an individual deductible of at least $1,500, or a family deductible of $3,000. You must also not be covered by other health insurance, not be enrolled in Medicare and not be eligible to be claimed as a dependent on someone else’s tax return.

The Bottom Line

A health savings account is ostensibly designed to help you pay for uncovered medical expenses in a tax-efficient way. But because of the way the account operates, it can be used for other purposes as well. Just remember that an HSA might not be an option for you if you’re covered by Medicare or a low-deductible health insurance plan. 

Are You Retirement Ready?

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