The Stealth Retirement Account You Should Know About
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Quick pop quiz: Which of these three statements about Health Savings Accounts is accurate?
• You should use your HSA money before you leave a job so you don’t lose it.
• If you contribute more than you’ll need for medical care, you’ll have to pay a penalty to use it.
• You’re going to have to pay taxes on your HSA money at some point.
If you said none of them, you’re right! But chances are someone you know would be wrong about at least one, given how easily misunderstood these accounts can be.
Here’s the thing: HSAs can become powerful investment vehicles — if they’re not overlooked. Their unique tax advantages, combined with their longevity and portability, can make them a smart way to save for the short-term or long-term. And if you use the money in retirement, you’ll have the flexibility to spend it on more than healthcare.
“HSAs are probably one of the best-kept secrets in the financial planning world,” says Brian Walsh, a Certified Financial Planner® and SoFi’s Head of Advice & Planning. “Most of us will have plenty of healthcare expenses in retirement, but if you’re lucky enough not to, you can use the money just like you would another retirement account.”
So what do you need to know? Here’s more on how HSAs work, when to use them, and what will maximize their potential.
Who’s Eligible for an HSA?
First off, in order to contribute to an HSA, you need to be covered by health insurance that’s been designated as a high-deductible health insurance plan, or HDHP, and it must be your only plan. In 2024, that was half of all private-sector workers participating in employer health plans, according to the Bureau of Labor Statistics.
Medicare and Medicaid don’t qualify, though Congress is weighing legislation that would allow people with Medicare Part A (and certain Obamacare plans) to use them too.
As the high-deductible part of the name suggests, HDHPs have higher out-of-pocket costs than other plans, so they’re not for everyone. (The median deductible for an HDHP in 2024 was $2,750, according to the BLS.) But they typically have lower premiums than other plans, so if you don’t anticipate a lot of health issues, they can be a more affordable option.
Then there’s getting the HSA.
Last year Americans had an estimated 61% of their 39 million HSA accounts through a job, according to research by Devenir, which operates an HSA investment platform.
But if your employer doesn’t offer one — or you’re self-employed — you can open an HSA yourself through any bank, brokerage or other provider that offers them.
Much like an IRA, each company’s HSA will have different investment options, though you may have to reach a certain balance before you can invest the money. (More on that later.)
The Triple Tax Advantage
Now to why HSAs are such powerhouses: If you use the money you put into an HSA for qualifying medical expenses, you won’t pay federal income tax on any of it — ever. Not on the money you put into the account, or on any investment gains, or on the money you spend for medical care.
In other words, unlike other tax-advantaged accounts like 401(k)s or traditional IRAs — where you’ll usually pay income tax once you’re retired and spending your money — you can avoid tax altogether as long as you use the money for healthcare. And that’s a valuable perk.
Let’s say you normally pay 25% in income taxes, so for every $100 you earn, you walk away with $75. That means a $150 doctor’s visit effectively costs you $200 of your pre-tax income.
But let’s say you put that $200 into an HSA. Then you’d cover that same doctor’s visit and still have $50 left to put toward a future visit. And if you don’t need the $200 right away and invest it in a mutual fund, for example, you could potentially earn even more — perhaps an extra $20 over a year, depending on the return.
How to Use HSAs to Save for Retirement
Before you turn 65, if you use your HSA money for something besides eligible healthcare, you will usually have to pay income tax on it plus a 20% penalty.
But an HSA balance doesn’t have to be used within a particular timeframe. And as we age, our healthcare costs are likely to increase, so it can make sense to build an HSA for use in retirement.
Healthcare and medical expenses are estimated to cost the average American $165,000 over their retirement, according to Fidelity Investments’ latest estimates, which were based on a person who retired at 65 last year.
Plus — and this is important — if you don’t wind up needing the funds in your HSA for healthcare, the 20% penalty is waived once you reach 65.
You’ll still owe income taxes on any withdrawals you make for ineligible expenses, but that’s no different than you would with many retirement accounts.
In other words, you might think of an HSA as more of a retirement account with a tax-free health care benefit.
A Cool Twist
Now, here’s something many are surprised to learn. Even if an HSA accountholder has eligible healthcare or medical expenses in the short-term, there’s nothing that says they have to use their HSA money for that purpose. If you can afford to cover those bills out of pocket, you can think of it as a retirement fund and just contribute regularly to an invested balance that will hopefully grow.
Why would you want to do that? Because you can reimburse yourself from your HSA decades after you open it — there is no time limit. So if you wait until you’re retired to reimburse yourself, you not only give your balance more time to grow, but can pay for non-medical items with your tax-free reimbursements.
In other words, that sunscreen you bought in 2010 could help fund your around-the-world retirement cruise trip in 2050, assuming you keep the receipt. Let that one sink in.
Factors to Weigh
Of course, no single strategy is right for everyone, so you’ll want to explore all the rules and weigh your circumstances before making any decisions about using an HSA. It may be helpful to consult a financial planner too. Here are a few important considerations.
• The contribution limits for HSAs tend to be lower than for other designated retirement accounts, so you may want to think of them as a valuable addition to your retirement savings strategy. In 2025, you can contribute up to $4,300 to your HSA ($8,550 if you have family coverage.)
• On the other hand, the HSA is the only type of account with a triple tax advantage, and unlike a Roth IRA, you can contribute no matter what your income level.
• Many employers will contribute to HSAs as a workplace perk. Last year the average contribution was $927, according to Devenir.
• Contributions lower your taxable income, though your tax benefit can work in two ways. If you have an account with your job, your employer will funnel your pretax contributions straight from your paycheck, much like a 401(k). If you have an HSA on your own, you’ll contribute post-tax dollars that will be deductible on your tax return.
• Many people use their HSAs as savings tools rather than wealth-building tools, in part because of a lack of awareness. Only 15% of accountholders invest their HSAs in assets other than cash, according to a recent analysis of 14 million HSAs by the Employee Benefit Research Institute.
• Like any investment account, there are risks involved. You’ll want to consider your risk tolerance (and the trade-offs of potentially losing money) before you invest any part of your balance.
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