As part of your employee benefits package, you have access to all sorts of things like health care coverage, a 401(k) plan and potentially even stock options. However, what could end up being the most beneficial may also be the most overlooked: a health savings account (HSA).

An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. They also have unique tax benefits that allow them to function similar to an additional retirement account. So, while you may have been told your HSA should be used for medical expenses (and that is absolutely true), there are actually many benefits to simply waiting to dig into your HSA funds until you retire.

How Do HSAs Work?

HSAs are tax-advantaged medical savings accounts that save you taxes on a wide variety of health care needs—even many that aren’t covered by health insurance—and combine the most powerful elements of both a Traditional and Roth IRA. Like a Traditional IRA, you get an immediate tax deduction on contributions. Like a Roth IRA, any earnings and distributions are tax-free, provided they’re used for qualified health care expenses. If they’re not used for qualified medical expenses, those distributions incur a 10% penalty.

Since contributions to an HSA are made on a pre-tax basis, it essentially means you’re contributing a portion of your tax bill into your health savings account. For example, pretend you’re in the 24% income tax bracket and are thinking about contributing $100 every month to your HSA. Normally, that $100 would incur a $24 tax bill, leaving a net of $76. When you contribute that $100, you can think of it as a $76 contribution with the other $24 being a tax bill. But as long as you use the distributions from the account to pay for qualified medical expenses, you’ll never have to pay that bill.

Unlike a flexible spending account (FSA)—another type of medical savings account offered in conjunction with your health care plan—the money you save in an HSA can accumulate from year-to-year. This allows you to grow the balance in your account during years when you have fewer medical expenses. Plus, you own the HSA, not your employer, so the money inside your HSA is yours to keep for the rest of your life. Even if you don’t have a lot of health care expenses right now, the benefits are so great that there’s little reason not to open an HSA and contribute to one if you’re eligible and the contributions fit within your budget.

How Do I Know If I’m Eligible for an HSA?

In order to contribute to an HSA, you need to be enrolled in a high-deductible health plan (HDHP), and you can’t be claimed as a dependent on someone else’s tax returns. Also, since Medicare isn’t classified as an HDHP, you’ll no longer be able to contribute to your HSA after you enroll in the program, though you’ll still be able to use the funds from your HSA for your medical expenses.

Why Should I Wait Until Retirement to Use My HSA?

There are two primary reasons why you should wait to use your HSA until your retirement years: the opportunity to save more through compounding interest, and the ability to be better prepared to pay for your expenses in retirement.

Save More by Compounding Interest

Consider this example: Person A contributes $1,500 annually to an HSA but uses $500 for medical expenses, creating a net contribution of $1,000 every year. Person B also contributes $1,500 annually but uses money from a checking account to pay the $500 in annual medical expenses. After 20 years, if we assume a 6% rate of return, Person A would have about $36,800 in an HSA while Person B would have about $55,200. While this is a hypothetical example, it illustrates the power of leaving your money to grow as long as possible.

Be Better Prepared to Pay for Expenses

Perhaps more important than the ability to save more is the fact that keeping the money within your HSA will better prepare you for the road ahead. Health care costs are something that many people routinely underestimate. The Employee Benefits Research Institute has found that retirees’ health care expenses are typically much higher than what they expected, and estimates for health care spending in retirement can approach $200,000—and those numbers don’t even include the costs associated with long-term care. These figures highlight the importance of saving for post-retirement medical expenses, and by not tapping into your HSA during your working years, you’re able to save that money for the times when health care costs are likely to be a far more significant portion of your budget.

Even if you’re fortunate enough to have abnormally low medical bills in retirement, the money in your HSA can be used for other living expenses. Once you turn 65, the 10% penalty for non-qualified medical expenses goes away. So, say your furnace goes out or you need to replace your roof, you can dig into your HSA to cover those costs. Although, you will still have to pay regular income taxes on those distributions that aren’t used for medical expenses. In essence, your HSA can function as a Traditional IRA with an upside during retirement.

How We Can Help

It’s important to evaluate your financial situation and make sure you can actually afford to wait until retirement to use the funds in your HSA. If you have medical expenses and don’t have disposable income readily available, then it is absolutely a good idea to use your HSA to pay for those expenses. Saving money in an HSA while ignoring your health or racking up debt will likely just add to your expenses later on.

However, if you have the flexibility to avoid touching your HSA until retirement, you may find yourself reaping the financial benefits later on. Consulting a financial advisor can help you figure out where you’re at in your retirement savings plan and help you determine how much a fully funded HSA can help.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Anita M. Buerkle

Anita M. Buerkle

Vice President, Financial Advisor

MBA, Series 7 Securities Registration,¹ Series 66 Advisory Registration,² Insurance License Anita has nearly 30 years of experience as a financial advisor, focusing on overall wealth management, as well as retirement and estate planning. She enjoys helping clients define their financial goals and creating plans that work towards achieving them. Prior to joining the finance industry, Anita worked in the medical field which helped her develop an ability to truly connect with the individuals...Read More