Using Your HSA for Retirement

Daniel Penzing
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What Is an HSA?

HSAs were instituted by Bush Jr., and were never really a big deal because they weren’t subsidized. People could put money into them, but just like 401k’s, they automatically lost money because of the taxes. The money you put in could NEVER be more than the money you would have to pay in taxes.

Before you could use it, you had to hit a certain age, 65, and you had to be retired, technically. Of course, I say that, but what I really mean is you had to have no more income coming in and be below a certain age, say, 64. Even if you were in good health, and had no income, you still could not use it, but if you were 65 and your health was fine, you could.

The biggest problem with this is when you reach 65 and you are healthy, you could technically change jobs or earn income that would be taken out of that account, and so that is where the big problems come in. That was really never that big a deal.

Is there a better way to fund retirement?

The Retirement Savings Opportunity

Health savings accounts (HSAs) are accounts which consist of, at a minimum, high-deductible health plans and are created to provide a tax-advantaged savings vehicle for the purpose of paying or covering current and future medical expenses.

Generally, for an individual to qualify for an HSA, the individual must not currently be covered under any health plan that is not a high deductible plan or have other health coverage, with the exception of certain limited types of coverage such as coverage under a health flexible spending account, certain types of casualty or property insurance, accident or disability income insurance, or specified disease insurance.

In order to be eligible to deduct contributions, the individual must be an eligible individual for the HSA. An eligible individual for an HSA is an individual who has a self-only coverage under a high deductible health plan and has no other coverage except permitted coverage in the case of an individual who has family coverage under a high deductible health plan.

Contributions can be made to HSAs regardless of age.

An individual is considered an eligible individual as of the first day of an HSA coverage period.

HSAs may generally be carried over from year to year, and can be transferred from one HSA to another HSA. HSA contributions can be made by either the individual or by a person other than the individual.

Non-tax-qualified distributions from an HSA may also include penalties.

Factoring the HSA Into Your Retirement Planning

Now that there is a provision for the tax benefits of HSAs to be used in retirement planning, account holders can use them with their retirement savings. The advantage of borrowing from the HSA is that the withdrawals will decrease the tax liability when the account holder is retired.

With that said, it’s important to keep in mind that you can withdraw money from your HSA, but you should be careful with it. The money will have to be repaid or the account will lose its special tax status. Also, keep in mind that you will have to repay the money even if you close your HSA account.

Here are some retirement planning ideas that use your HSA money.

You can use the HSA funds to make a loan to yourself for low-interest retirement. Let’s say that your friend offers you a loan at 5% interest, and you have a HSA earning 1% interest.

Use your HSA for a health-related expense. You can use the money for cosmetic and non-elective medical procedures that are not covered by your insurance.

Tax Benefits

Having a flexible savings account, like the HSA, has lots of advantages. These can make your retirement funds last longer and save you on premiums and out of pocket costs.

Tax Benefits of Using a HSA for Your Retirement

The most obvious HSA benefit is its tax-free nature. What you don’t use for your deductible medical expenses in any given year can be carried over to the next year. If you don’t use the money for health expenses, your HSA can be used for anything. You can withdraw it upon retirement provided you are using it for medical expenses and incur penalty free early retirement penalty.

Some of the things you can do with your HSA besides pay medical expenses include:

  • Buy health insurance
  • Pay health insurance premiums
  • Buy a long term care policy
  • Pay for your prescription medications
  • Pay for your co-pays
  • Pay for your dental expenses
  • Pay for nursing home care
  • Take Required Minimum Distributions

There are a few options for taking a withdrawal from your HSA. The least complicated is the required minimum distribution, or RMD. Once you’re past age 70.5 you must withdraw a certain amount each year to avoid paying a penalty.

When You Die

What Happens to Your HSA?

Health Savings Accounts combine the power of tax-advantaged savings and a high-deductible health plan to provide a powerful and flexible way to save for health care expenses. HSA contributions are never taxed, investments and account interest compound tax-free for years, and distributions for qualified expenses are tax-free. You can roll over assets if you change employers or retire. Your account can accumulate for your children until they are twenty-six, even if they are not covered by your high-deductible health plan!

But what happens to your HSA when you die?

In our opinion, the HSA is a wonderful legacy vehicle. When you decide to fund an HSA for your children, you are not just saving for your own retirement. You are also providing them with the means to pay for medical expenses and retire someday.

But when you die, the HSA is your responsibility. You cannot make contributions to the HSA in the year of your death. It is your responsibility to close it out properly and let your beneficiaries know how to obtain the money.


If you’re serious about saving for retirement through an HSA, take advantage of the tax-preferred status your HSA offers and avoid paying taxes on the front end, when you are putting that money into your HSA. Doing so will allow you to put more money away for retirement.

HSA funds are tax-exempt, and you can make contributions to your HSA whether you are employed or not, without any tax consequences. If you are unemployed and not covered by another health plan, you can still make tax-deductible contributions to your HSA. You can only add money (tax-free) to the account if you have a high deductible health plan.

There is also an employer-based HSA plan, and if your employer offers this, you should make use of it if you can. It can provide you tax-favored savings for retirement if you have a high deductible health insurance plan and aren’t covered by another health plan. Setting up an HSA with your employer may be a good option for you, even if you are not enrolled in your employer’s high deductible health plan, because if your employer does not have an HSA set up, you cannot establish one on your own unless you are enrolled in a high deductible health plan.