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HSA for Retirement: Rules, Benefits, and Getting Started

February 26, 2021 · 7 minute read

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HSA for Retirement: Rules, Benefits, and Getting Started

If you have a high-deductible health plan, chances are you’re eligible to save money for medical expenses in a tax-free health savings account (HSA). You might already know that, and perhaps you’re currently contributing pre-tax dollars to your HSA. But did you know that HSAs can be used for more than just out-of-pocket medical expenses?

An HSA can be a useful 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 traditional retirement plans like an IRA and a 401(k) plan.

What Is an HSA?

A Health Savings Account is a type of tax-advantaged savings account for individuals with a high-deductible health care plan—defined by the IRS as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.

Anyone who fits the criteria is eligible to open an HSA and save pre-tax dollars: up to $3,550 a year for individuals and up to $7,100 for families for the 2020 tax year. If you’re 55 or older at the end of the tax year, you can contribute an additional $1,000.

HSA Bank calculator

An employer can also make a matching contribution into your HSA, though total employer and employee contributions can’t exceed the annual limits. You can then withdraw funds in your HSA to pay for qualified medical and dental health care expenses, including copays for office visits, diagnostic tests, supplies and equipment, over-the-counter medications and menstrual care products as of 2019. Unlike flexible spending accounts (FSA), the money in an HSA doesn’t have to be used by the end of the year. Any money in that account remains yours to access, year after year.

Before age 65, there is a 20% penalty for withdrawing funds from an HSA for non-medical expenses, on top of ordinary income tax. After age 65, HSA holders can also make non-medical withdrawals on their account, though ordinary income tax applies.

3 Reasons to Use an HSA for Retirement

Though they aren’t specifically designed to be used in retirement planning, it’s possible to use an HSA for retirement as a supplement to other income or assets. Because you can leave the money you contribute in your account until you need it for qualified medical expenses, the funds could be used for long-term care, for example. Or if you remain healthy, you could tap your HSA in retirement to pay for everyday living expenses.

There are several advantages to including an HSA alongside a 401(k), Individual Retirement Account, and other retirement savings vehicles. An HSA can yield a triple tax benefit since contributions are tax-deductible, they grow tax-deferred, and once you withdraw those funds for qualified medical expenses, distributions are tax-free. If you’re focused on minimizing tax liability as much as possible prior to and during retirement, an HSA can help with that.

Using an HSA for retirement could make sense if you’ve maxed out contributions to other retirement plans and you’re also investing money in a taxable brokerage account. An HSA can help create a well-rounded, diversified portfolio for building wealth over the long term. Here’s a closer look at the top three reasons to consider using HSA for retirement.

1. It Will Lower Your Taxable Income

You may not be able to make contributions to an HSA in retirement, but you can score a tax break by doing so during your working years. The money an individual contributes to an HSA is deposited pre-tax, ultimately lowering their taxable income. Furthermore, any employer contributions to an HSA are also excluded from a person’s gross income.
The 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), account holders are taxed either when they contribute or when they take a distribution. Using HSA for retirement could help you balance out your tax liability.

2. You Can Save Extra Money for Health Care After Retirement

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

Because the money is allowed to accumulate, using an HSA for retirement can be a good way to stockpile money to pay for health care, nursing care, and long-term costs (all of which are qualified expenses) if needed. While Americans can enroll in Medicare starting at age 65, most long-term chronic health care needs and services aren’t covered under Medicare. Having an HSA to tap into during retirement can be a good way to pay for those unexpected out-of-pocket medical expenses.

3. You Can 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 any interest, dividends, or capital gains you earn from an HSA are nontaxable. Plus, in retirement, there are no required minimum distributions from an HSA account—you can withdraw money only when you want or need to.

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

But if that is the case, come retirement (after age 65) you’ll be able to use HSA savings to pay for both medical and non-medical expenses. While funds withdrawn to cover medical fees won’t be taxed, you can expect to pay ordinary income tax on non-medical withdrawals.

HSA Contribution Limits

As you are planning contributing to an HSA—whether for immediate and short-term medical expenses, or to help supplement retirement savings—it’s important to take note of HSA contribution limits. If your employer makes a contribution to your account on your behalf, your total contributions for the year can’t exceed the annual contribution limit.

2020 HSA Contribution Limits:

•  $3,550 for individual coverage
•  $7,100 for family coverage
•  Individuals over age 50 can contribute an additional $1,000 over the annual limit

2021 HSA Contribution Limits

•  $3,600 for individual coverage
•  $7,200 for family coverage
•  Individuals over age 50 can contribute an additional $1,000 over the annual limit

As with an IRA, you have until the tax filing deadline to make a contribution for the current tax year. So if you wanted to contribute money to an HSA for 2020, you’d have until April 15, 2021 to do so.

Another caveat: Once you enroll in or become eligible for Medicare Part A benefits, you can no longer contribute money to an HSA.

How to Invest Your HSA for Retirement

An HSA is more than just a savings account. It’s also an opportunity to invest your contributions in the market to grow them over time. Similar to a 401(k) or IRA, it’s important to invest your HSA assets in a way that reflects your goals and risk tolerance.

It’s also helpful to consider the other ways you’re investing money to make sure you’re keeping your portfolio diversified. Diversification is important for managing risk. From an investment perspective, an HSA is just one part of the puzzle and they all need to fit together so you can make your overall financial plan work.

Using an HSA for Retirement FAQs

These are some common questions you might have if you’re considering using your HSA to help save for retirement.

Can HSA Be Used for Retirement?

HSAs are not specifically designed to be a retirement planning vehicle, but you can use an HSA for retirement, since the money accumulates in your account until you withdraw it tax-free for qualified medical expenses. You could also use your HSA funds to pay for other retirement expenses after age 65—you’ll just have to pay income tax on those withdrawals.

What Happens to an HSA When You Retire?

An HSA doesn’t go away when you retire; instead, the money remains available to you until you need to use it. As long as withdrawals pay for qualified medical expenses, you’ll pay no taxes or penalties on the withdrawals. And your invested contributions can continue to grow as long as they remain in the account.

One advantage of using an HSA for retirement versus an IRA or 401(k) is that there are no required minimum distributions. In other words, you won’t be penalized for leaving money in your HSA. Though there is a 20% penalty for using the money for non-medical expenses before age 65.

How Much Should I Have in HSA at Retirement?

The answer to this question ultimately depends on how much you expect to spend on healthcare in retirement, how much you contribute each year, and how many years you have to contribute money to your plan. Say, for example, that you’re 35 years old and making contributions to an HSA for retirement for the first time. You plan to make the full $3,550 contribution allowed for individual coverage for the next 30 years.

Assuming a 5% rate of return and $250 in medical spending each year, you’d have just over $230,000 saved in your HSA at age 65. Using an HSA Bank calculator to play around with the numbers can give you a better idea of how much you could have in your HSA for retirement if you’re saving consistently.

When Can I Use My HSA Funds?

Technically, your HSA funds are available to you at any time. So if you have to pick up a prescription or make an unscheduled visit to the doctor, you could tap into your HSA to pay for any out of pocket costs not covered by insurance. But if you’re interested in using an HSA in retirement, it’s better to leave the money alone as much as possible so that it has more opportunity to grow over time.

The Takeaway

A health savings account can be a valuable tool in your current budget, to help pay for out-of-pocket medical costs, tax-free. But it can also be used to accumulate savings (and interest) tax-free, to be used on medical and non-medical expenses in retirement.

It’s never too early—or too late—to start saving for retirement, and when you open an investment account with SoFi Invest®, you can begin investing with as little as $1. Or check out other retirement accounts, like a traditional or Roth IRA.

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


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