A Health Savings Account (HSA) is a powerful financial tool available to many Americans, yet they remain underused and often misunderstood, says HSA expert Roy Ramthun. Here’s what you should know about how to use an HSA to secure a successful retirement.
An HSA is a trust or custodial account similar to an individual retirement account (IRA). Funds in the account may be used to pay for qualified medical expenses tax-free. The funds may be invested so that contributions grow and compound over time.
An HSA is an individually owned account but you can use the funds in an HSA to pay for the medical expenses of your spouse and dependent children. There is no limit on the number of HSAs an individual can own, but the total amount he/she can contribute to all the HSAs for a particular year is limited. Unfortunately, most health FSAs (flexible spending accounts) disqualify individuals from participating in an HSA in the same year. Dependent-care FSAs do not disqualify them.
Most people get their HSAs through their employers, which usually offer “cafeteria plans” that allow workers to deduct HSA contributions from their pay. Some employers also match those contributions or provide lump-sum contributions to their employees’ accounts.
People who are self-employed also can open HSAs. Fidelity, Bank of America and similar companies provide them, as do many smaller financial institutions, especially those that also offer IRAs. You can shop for HSA providers at HSASearch.com.
To qualify for an HSA, you must have what is considered a high-deductible health insurance plan (HDHP). For 2025, the deductible for your insurance plan must be at least $1,650 for a policy that covers only the account owner. For family coverage, covering two or more people, the deductible threshold doubles…to $3,300. These amounts are adjusted annually for inflation.
Caution: For obscure technical reasons, an insurance plan may have a deductible higher than the minimum and yet not qualify you for an HSA. But most companies bill their qualifying plans as “HSA-qualified.” If it’s unclear whether your insurance plan meets all the criteria, ask the insurer or your employer to confirm that the plan qualifies you for an HSA.
As with an IRA, you control how your assets are invested. An HSA may be invested in stocks, bonds, mutual funds, certificates of deposit, annuities, real estate and more. Most account providers offer a variety of high-quality mutual funds and other investment options.
As long as you remain eligible, you can continue contributing to an HSA until you sign up for Medicare, which most people do at age 65.
Each year, the IRS sets a limit on the amount you may contribute to HSA(s). For 2025, an individual under age 55 with self-only coverage may contribute up to $4,300…or $5,300 if 55 or older. Someone with family coverage may contribute up to $8,550 if under age 55…or $9,550 if 55 or older.
One of the great misunderstandings regarding HSAs occurs when people confuse them with FSAs. While FSAs also help you save for medical expenses, they are “use-it-or-lose-it” accounts—the funds must be depleted by the end of each year. That’s not the case for HSAs. Employees often ask, “Does my HSA roll over?” That question reveals a fundamental misunderstanding of the nature of HSAs—their funds continue to grow from year to year, but they don’t “roll over” any more than the funds in an IRA or 401(k) do.
HSAs provide three stellar tax advantages…
Contributions to an HSA are not taxed as wages, meaning no income tax or payroll taxes are deducted from them. Self-employed individuals may take an above-the-line deduction on contributions. Example: Someone making $42,000 in income who contributed $2,000 to an HSA during the year would have a taxable income of $40,000 before other adjustments.
HSA funds grow tax-free. That can include simple interest as well as gains on investments.
HSA withdrawals are tax-free if you spend the money on what the IRS considers to be qualified medical expenses. The most detailed list of qualified medical expenses is available at IRS.gov in IRS Publication 502, Medical and Dental Expenses.
While the IRS allows you to withdraw money from your HSA for non-medical expenses, it discourages the practice by imposing income tax on the withdrawn amount plus a 20% penalty. Once you turn 65, you may withdraw funds for non-medical expenses without incurring the 20% penalty, but you still must pay the income tax.
Note: While your contributions to the HSA can be deducted from your income, you cannot write off (deduct) medical expenses paid via HSA from your taxes, as that would be tantamount to a double deduction.
Another benefit: HSAs can be used to save for retirement. Using an HSA to save for retirement is not a “hack” but rather a key purpose for which these accounts were designed. During retirement, the average person will accrue $160,000 to $185,000 in medical expenses.
You may use HSA withdrawals to pay your Medicare premiums as well as any of the out-of-pocket expenses that Medicare doesn’t cover, including deductibles, copays, coinsurance, dental, vision, hearing and long-term care. (Note: You cannot use the funds to pay premiums for a Medicare supplement policy.)
A smart retiree will use an HSA along with his/her retirement plan to juggle expenses. Example: You will have a $3,000 medical expense someday. You could either put $3,000 in your HSA today and use that money tax-free later to pay the expense…or you could put money into your retirement plan to pay it when the time comes. But money from the retirement plan will not come out tax-free. If you’re in the 25% tax bracket, you’d need to put $4,000 into your retirement plan so that you’d have $3,000 left after taxes to pay the health-care expense.
Good retirement planning requires prioritization and holistic thinking. An HSA should be part of every retirement plan because the advantages are just too good to pass up. If you don’t currently have a high-deductible health insurance plan, it’s probably worth switching to one so that you qualify for an HSA.
Successful retirement saving also requires discipline. A recent analysis by the Employee Benefit Research Institute (EBRI) found that an employee could save $1 million in an HSA. That’s assuming he starts at age 25…maxes out his contributions every year…and attains a 7.5% rate of return. It’s also assuming he leaves that money untouched rather than using it to pay medical expenses along the way.
Not everyone will be fortunate enough to avoid tapping into their HSA funds before retirement, but to the extent possible, try to find other means to pay medical expenses so that the HSA continues to build. Even if you need to reach into your HSA to pay medical expenses before retirement, be comforted by another EBRI analysis that found you still can amass more than $500,000 in an HSA even if you spend half of the money you put in each year.
If $1 million seems an excessive sum for medical bills during retirement—especially when considered against the estimate of $165,000 to 185,000 in medical needs—don’t forget that the money in the account may be used for other reasons during retirement. You’ll just have to pay income taxes on it as you would from your retirement account.
Things can get complicated when both spouses are working and each has an HSA. To make sure you’re getting optimal tax advantages and not making any missteps, get help from a financial advisor who is well-versed in HSAs and comfortable giving advice about them.
