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Using an HSA for Retirement

May 03, 2019 · 4 minute read

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Using an HSA for Retirement

As of 2004, Americans enrolled in a high-deductible health plan can opt to save money for medical expenses in a tax-free health savings account (HSA). Many financial experts say that HSAs can be used for more than just paying medical bills.

They’re also a good vehicle for boosting your retirement savings, especially if you’re young, healthy, and rarely visit the doctor. HSAs provide an additional means for accumulating tax-advantaged savings for retirement beyond an IRA and a 401(k) plan.

If you have a high-deductible health care plan—defined by the IRS as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family—you are eligible to open an HSA and save up to $3,450 a year for individuals and up to $6,900 for families.

If you’re 55 or older at the end of the tax year, then you can contribute an additional $1,000 bringing those totals up to $4,450 for individuals and $7,900 for families. If both spouses meet the age requirement, the total contributions under family coverage jump to $8,900. Here’s a look at how to use an HSA for retirement.

Lower Your Taxable Income

The money you have contributed to an HSA is deposited pre-tax, ultimately lowering your taxable income. Even if your employer is contributing to your HSA, that money will be excluded from your gross income.

Plus, any money you’ve deposited in an HSA earns interest and contributions are withdrawn tax-free, provided the funds are used for qualified medical expenses. In comparison, with a Roth IRA or 401(k), you are either taxed when you contribute or when you take a distribution.

Save Extra Money for Health Care After Retirement

Unlike Flexible Spending Accounts that allow you to save pre-tax money for health care costs but require you to use it the same calendar year, there is no use it or lose it option with an HSA. If you don’t use the money in your HSA, the funds are available the following year. There is no time limit on spending the money.

Because the money is allowed to accumulate, an HSA can be good way to stockpile money to pay for health care, nursing care, and long-term care after retirement. It’s no secret that our healthcare costs increase as we get older. On average individuals spend about $122,000 on out-of-pocket health care expenses between the time they turn 70 and when they pass away.

While Americans can enroll in Medicare starting at the age of 65, most long-term chronic health care needs and services aren’t covered under Medicare. Having an HSA after retirement can be a good way to pay for those unexpected out-of-pocket medical expenses.

Boost Your Retirement Savings

Beyond paying for medical expenses, HSAs can be used to save for retirement. Unlike a Roth IRA, there are no income limits on saving money in an HSA. Some plans even allow you to invest your HSA savings, much like you would invest in a 401(k). This can further augment your retirement savings because the interest, dividends, or capital gains you earn from an HSA are nontaxable.

If you are currently enrolled in a high deductible health insurance plan, you may consider opening an HSA. If you are young and healthy or can already afford the cost of out-of-pocket medical expenses, you can use an HSA to start stockpiling money for your retirement.

After age 65, you can even use the money in your HSA to pay for non-medical expenses. However, if you withdraw money for non-healthcare payments before age 65, you’ll pay a 20% penalty. Another caveat is, once you enroll in or become eligible for Medicare Part A benefits, you can no longer contribute money to an HSA.

However, experts warn that saving for retirement with an HSA really only works if you’re young and healthy, rarely have to pay health care costs, or can easily pay for them out of your own pocket.

Planning for Retirement: Beyond an HSA

If you are looking to actively prepare for retirement, consider opening an investment account with SoFi in addition to your HSA. It’s never too early—or too late—to start saving for retirement, and at SoFi you can begin investing with as little as $100. When you invest with SoFi, you’ll have access to a team of qualified personal financial advisors who can help you reach your financial goals.

Ready to take the next steps in saving for retirement? Open a SoFi Invest account today.


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