How to Use a Health Savings Account (HSA) to Build Wealth for Retirement

One of the best ways to build wealth for retirement probably isn’t what you think it is.

It’s not your 401k or an IRA (although I love those accounts too!)

It’s not a pension. Or an inheritance.

It’s a health savings account. Yup, you can save money in a health savings account for retirement!

“Megan, you’re crazy! How can a health savings account be a better way to save for retirement than my 401k?”

Even though HSA’s are primarily marketed as a way to save for medical expenses, they make even better retirement accounts.

An HSA is an amazing, tax-advantaged account to add to your retirement planning strategy. And it often gets overlooked in the sea of Roth IRA’s, 401k’s, 403b’s, pensions, and other traditional retirement accounts.

55% of people with health savings accounts don’t contribute to them! So it is my mission to educate every HSA-eligible person how to use their health savings account for retirement and wealth-building.

This post is all about the benefits of an HSA, why you want one, and a few strategies to use your health savings account for retirement.

And if you’re totally lost about where to start to saving for retirement, check out this post: The Complete Beginner’s Guide to Saving for Retirement.

If you’re eligible for an HSA, you don’t want to miss out on the amazing benefits of this account!

What is a Health Savings Account?

A health savings account (HSA) is a tax-advantaged savings account that lets you save for future medical expenses.

The account is not tied to your employer, and you’re allowed to invest the money so it grows for your future.

It is also the only account with a triple-tax advantage.

You contribute pre-tax dollars (saving money on taxes now), the invested money grows tax-free, and you can withdraw money tax-free for eligible medical expenses.

Oh, and it also becomes a regular IRA at age 65, meaning you can withdraw money for any reason with no penalties (you will have to pay income tax, however).

The catch?

You have to be on a high deductible health insurance plan to be eligible. The HDHP + HSA combo can be a great option for those of us with relatively low medical costs.

I’m not a financial advisor or health insurance expert, so please do you own research when choosing your health insurance plan. The purpose of this post is for education only, not advice.

This post may contain affiliate links, which means I get a small commission should you choose to purchase or sign up through one of my links, at no extra cost to you. I only recommend products that I personally use and believe in. You can read more about this in my disclaimer.

Health Savings Account Rules

Since a health savings account is such a powerful way to build wealth, the IRS has some pretty strict rules about who can open an HSA and how much you can contribute.

Here are some of the rules surrounding health savings accounts:

• You must be on a high deductible health insurance plan (minimum deductible is $1400 for an individual plan, $2800 for a family plan)
• In 2022, you can contribute a maximum of $3650 per year if you’re on an individual plan, or $7300 for a family plan
• If you’re age 55 or older, you’re allowed an extra $1000 “catch-up” contribution
• You can use the money to pay for eligible medical expenses tax-free (the list is pretty comprehensive, check it out here)
• You can reimburse yourself for medical expenses from your HSA tax-free (ex. if you pay $200 for contacts out of pocket, you can reimburse yourself from your HSA tax-free)
• You cannot be on Medicare or claimed as a dependent on someone’s tax return
• The funds roll over each year and can be invested (i.e. it’s not “use it or lose it” money)

If you’re eligible for a health savings account, I highly suggest opening one and contributing to it.

How to Open an HSA

Even though your HSA isn’t tied to your employer, they might have an option for you to contribute to an account through payroll deductions.

If a payroll-deducted HSA isn’t an option for you, that doesn’t mean that you can’t open one!

Check the list below for some of the best HSA providers:

HSA Provider	Account Fees	Investment Options	Investment Cash Minimum
Health Equity	No monthly fees	Low-cost Vanguard funds	$500 minimum
First Dollar	No monthly fees	Links with TD Ameritrade for self-directed investing	No minimum
Lively	No monthly fees	Links with TD Ameritrade for self-directed investing or a guided portfolio through Devenir for a fee	No minimum
Fidelity	No monthly fees	Wide array of self-directed or managed investment options	No minimum
HSA Bank	$2.50 per month if account balance is less than $3000	Links with TD Ameritrade for self-directed investing or a guided portfolio through Devenir for a fee	$1000 minimum

The provider is less important than actually opening the account and putting money into it.

Personally, I’d go with one that doesn’t have monthly fees or an investment minimum.

Out of the HSA providers listed here, I’d choose First Dollar, Lively, or Fidelity.

You’ll have to open an account, show proof of eligible health insurance (aka, the high deductible plan we just talked about), and make contributions directly from your bank account.

Most providers will send you a free debit card that you can use to pay for eligible medical expenses directly from your HSA.

Health Savings Account Benefits

There are a ton of benefits to contributing to an HSA, especially if you’re looking to use your health savings account for retirement!

Triple Tax Advantage

The absolute best benefit of an HSA is the triple tax advantage.

No other account will save you money on taxes NOW, let it GROW tax-free, and let you WITHDRAW the funds tax-free.

The HSA lowers your tax bill now by reducing your taxable income by the amount you contribute each year.

An individual making $50,000 per year would save around $800 in federal taxes just by maxing out the $3600 HSA contribution.

Not too bad considering that the $3600 you contributed will grow tax-free AND you saved money by doing it. And you won’t have to pay taxes at all if you use the money for qualified medical expenses in the future.

If you hate paying taxes like me, the health savings account is the perfect account for you. Shield as many of your hard-earned dollars from wasteful government spending as you can.

HSA’s Can be Invested to Build Wealth

Your health savings account can also be invested to build wealth for retirement!

Your HSA can exist in a savings account tied to a debit card AND a separate investment account.

If you choose to invest all the funds in your HSA (meaning there won’t be any money in the HSA savings account), don’t use the debit card since the savings account balance would be $0.

Instead, you can pay for the expense out of pocket and reimburse yourself from your HSA tax-free.

You’ll need to save the receipt to verify that the money was used on a qualified health expense, transfer the money from your HSA investment account into your HSA savings account, and then transfer the money into your normal bank account.

Of course, I recommend not using your HSA to pay for health expenses now, if you can afford it. The money will grow faster if you don’t touch it!

The absolute best way to use a health savings account for retirement is to contribute the maximum each year and not touch the money until you’re done working.

Of course, if you have a medical emergency use the HSA money if you need to!

A health savings account can double as a medical emergency fund and a retirement account. Pretty neat!

The Money Rolls Over Each Year

An HSA is different than a flexible spending account (FSA) because the money rolls over each year.

You don’t have to “use it or lose it” like you do with an FSA.

Not Tied to Your Employer

Your health savings account is an individual account and is not tied to your employer.

That means your HSA goes with you if you leave your job!

It Turns into an IRA After Age 65

Another cool benefit of health savings accounts are they they turn into a traditional IRA at age 65.

This means you can use the funds for anything you want with no penalty, but you will have to pay income tax on the withdrawals (like your 401k).

Of course, you can still use the funds in your HSA for medical expenses tax-free at any time.

By letting that money grow and compound over time, you’re basically building a separate tax-free nest egg for future health costs.

And if you save too much money and don’t need it all for health purposes?

The rules are the same as a traditional IRA or 401k.

No Required Minimum Distribution

Did you know that the IRS will force you to start taking distributions from your 401k at age 72, even if you’re still working?

It’s true!

Since your 401k is a tax-deferred retirement account, the IRS hasn’t gotten paid yet. So they force you to withdraw money after a certain age in order to get tax revenue.

Your HSA?

No required minimum distributions. So you’re free to let your money compound tax-free indefinitely.

Is an HSA Worth It?

If this article hasn’t done enough to convince you that an HSA is definitely worth it, I’ll make it crystal clear: YOUR HSA IS WORTH IT!

Fidelity estimates that a 65-year-old couple retiring in 2021 will spend approximately $300,000 on health care costs in retirement. That’s in addition to being covered by Medicare.

By investing and growing money in your HSA, you won’t have to tap your other retirement accounts to pay for medical costs.

Which means you have more money to spend on luxurious beach vacations, margaritas by the pool, or spoiling your grandkids.

That factor alone is worth it to me.

A health savings account is also a great way to supplement your health care costs if you retire early (before age 65).

Since most people have health insurance through their employer and aren’t eligible for Medicare coverage until age 65, what do you do about health insurance if you want to leave your corporate career before age 65?

Your only real option is to purchase a private plan on the Health Insurance Marketplace.

Private health insurance plans can be pretty expensive. The cheaper plans typically have a sky-high deductible (think $7000 – $9000 per year) and don’t cover much.

They’re basically just a “disaster plan” that would keep you from bankruptcy if you have a medical emergency.

A fat HSA balance can help you manage the higher costs of private health insurance by allowing you to choose a plan with cheaper monthly premiums because you can afford a lot of those out of pocket costs through your HSA.

The only catch is that you can’t pay for private health insurance premiums out of your HSA.

But, it gives you the option to choose the plan with the cheapest monthly premiums because you can afford all of the out of pocket costs.

Think about it. I’d bet some serious coin that your health care costs will increase in the future.

50-year-old you will probably spend more on medical care than 25-year-old you. So, 25-year-old you could save and invest some money so that 50-year-old you isn’t worried about how to pay for healthcare in the future (either for you, your spouse, or your kids).

In addition to those insanely amazing benefits, the tax savings you receive each year is worth it in and of itself.

Especially if you’re a high-income earner on a family plan, having an extra $7300 reduction of taxable income is substantial.

Do future you a favor and start saving that tax-free health care nest egg now!

How to Use a Health Savings Account for Retirement

If you’re young, relatively healthy, and don’t spend much on medical expenses, using your a health savings account for retirement can be a really smart move.

Here’s how to use your health savings account to build wealth tax-free for retirement!

#1 – Open an HSA While You’re Eligible

The first step is to open an HSA if you’re eligible.

Again, make sure that a high deductible plan makes sense for you and that you meet all of the eligibility requirements.

#2 – Make a Separate Savings Plan for Health Expenses

If you decided that you want to use your health savings account for retirement, the next step is to figure out how you’re going to pay for health care costs now (since you won’t be tapping the HSA).

The best way to do this is to save money in a sinking fund each month. A sinking fund is setting money aside for large or irregular purchases ahead of time, so they don’t bust your budget.

You can open a separate savings account earmarked for medical expenses, contribute a certain amount monthly, and then pull the money out of savings when you need it.

Of course, you should also have an emergency fund, in case of a medical emergency. The sinking fund is simply a way to manage smaller costs (like prescriptions, doctor visit co-pays, or contacts).

If something major happens and you don’t have enough money in your medical sinking fund, then I would pull from the emergency fund.

If your emergency fund doesn’t cover the full amount, then you can pull from the HSA.

Think of your medical sinking fund and emergency fund as an insurance policy to not touch your HSA! (But it is there if you really need it).

Related: How Big Should Your Emergency Fund Be?

#3 – Contribute to Your HSA Each Year

Now you need to make a plan to contribute to your HSA each year!

I highly recommend maxing out the $3650 or $7300 contribution each year, if you can afford it.

The more you contribute, the more money you’ll have in retirement!

#4 – Invest the Money in Your HSA

An HSA isn’t an investment itself, it’s an account that holds investments. So once you contribute money into the account, you’ll need to purchase mutual funds or ETF’s inside of that account.

If you’re totally new to investing and have no idea where to start, I highly recommend Personal Finance Club’s Index Fund Investing course.

It’s perfect for beginners and will explain everything you need to know about investing. He even shows you step-by-step how to buy a stock!

Don’t make the mistake of contributing money into your account and not investing it. Your money won’t grow if you don’t invest it!

#5 – Pay for Medical Expenses Out of Pocket (But Save the Receipts!)

When you have a medical expense, pay for it out of your medical sinking fund and save the receipts!

You can reimburse yourself tax-free from your HSA at any time with no penalties.

Even years or decades later.

My suggestion?

Take a photo of every receipt and upload it to a “medical expenses” folder on your Google drive. No need to keep track of paper, it’s accessible everywhere, and you won’t lose them!

And try to not touch the money in your HSA for as long as possible so it will grow faster!

#6 – Let the Money Grow Tax-Free and Reimburse Yourself in the Future

Keep contributing to your HSA, purchasing index funds, and watch the value of your account compound over time. This part requires some patience, but it is so worth it.

Enjoy saving some money on taxes now while building a tax-free nest egg for medical costs in the future.

Use the money to pay for medical expenses after you leave your corporate job or in retirement, or let it turn into a traditional IRA at age 65.

Or reimburse yourself tax-free for your kids’ college tuition, a car replacement, or home improvement project with eligible receipts.

The options are endless.

Summary: Using a Health Savings Account for Retirement

HSA’s are a great way to save some money on medical costs now, but it’s even better to use your health savings account for retirement.

Your medical expenses will typically increase as you age, and so should your net worth.

So make it a priority to max out the $3650 or $7300 contribution each year, invest the money, and don’t touch it!

The potential for tax-free growth and redemption for medical costs in the future makes a health savings account better for retirement than a 401k.

At the very least, you can pay for current medical costs tax-free or let it become an IRA at age 65. And both of those things are pretty dang awesome!

Are you currently on a high deductible plan with an HSA?

Let me know what you think about using your health savings account for retirement in the comments below!

-Megan

Read next: The Complete Beginner’s Guide to Saving for Retirement