Using an HSA for Retirement Savings

Jennifer A. Digiovanni, November 2017

Using an HSA for Retirement Savings

If you’re enrolled in a high-deductible health plan (HDHP), you probably have access to a health savings account (HSA) to help shoulder the costs of health care. If so, when you set aside money to cover the out-of-pocket medical costs with your HDHP, you’re already enjoying the tax benefits.

However, what you may not realize, though, is that because HSA benefits are similar to those of retirement accounts, using an HSA for retirement savings can be an appealing additional option for building your financial nest egg.

Qualifying for an HSA

While HDHPs have lower premiums, they require higher deductibles before traditional benefits kick in. So if you use an HDHP, expect to pay significant out-of-pocket medical expenses before you reach your annual deductible. For 2019, the IRS states that HDHP annual deductibles must be at least $1,350 for individual coverage or $2,700 for family coverage. If you’re enrolled in an HDHP, you can use your HSA to save for medical expenses and receive tax benefits for doing so.

It’s important to remember, though, that HSAs are held in only one person’s name. There are no "joint accounts," however an HSA can be accessed by anyone covered by the HDHP (i.e., spouse, dependents, etc.) — they just won’t be able to contribute to it.

Understanding the Tax Benefits of HSAs

HSAs offer a tax-free savings opportunity with three important tax advantages:

  1. Pretax income can be directed into an HSA and remain tax-free.
  2. Interest earned in the account is also tax-free.
  3. Withdrawals made to pay for qualified medical expenses are not taxed.

These tax benefits help you get more out of the money you put toward qualified health care expenses.

Using an HSA for Retirement Planning

In addition to taking advantage of your HSA's tax benefits to save for medical costs, these accounts also offer long-term retirement savings benefits similar to those of 401(k)s and IRAs. In fact, it's easier than you might think to build up the money in your HSA. Some employers will distribute a "bonus" or otherwise contribute to their employees’ HSA fund, making it easier to reach certain savings goals. Plus, unlike a flexible spending account (FSA), your entire unspent HSA balance can be carried forward into the next plan year.

In 2018, the HSA contribution limit was $3,450 for individual coverage and $6,900 for families. For those over 55, a $1,000 catch-up contribution was permitted. Note that if you're enrolled in Medicare, you can't contribute to an HSA. For 2019, HSA owners will see an increase in the contribution limits for both self-only and family coverage. The annual contribution limit for individuals with self-only coverage will go up by $50 to $3,500. For those with family coverage, their annual contribution limit will go up by $100 to $7,000.

Taking Advantage of HSA Retirement Benefits

An HSA contains certain inherent advantages over traditional retirement savings accounts like IRAs. You may even consider funding this account prior to your IRA, depending on the goals of your retirement plan. If you plan to use all of the money saved in your HSA for current or future medical expenses, you will not incur taxes upon distribution, unlike with an IRA. Only withdrawals used for non-qualified medical expenses are taxed. Although, once you reach the age of 65, you may withdraw from your HSA for any purpose without penalty. If you do, money spent on non-medical expenses will be taxed at your current tax rate. Additionally, the money you direct from your paycheck into your HSA is not subject to tax upon contribution, unlike with a Roth IRA.

Due to their relatively low annual limits, using HSA contributions for retirement works best as a long-term strategy. Slowly building your HSA balance can help you shoulder the costs of medical care and other expenses after you stop working. If you have questions about using an HSA for retirement purposes, meet with a personal financial planner. They can help you review your options and decide where to invest your savings in order to gain the maximum future benefit.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

This information and recommendations contained herein is compiled from sources deemed reliable, but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or is offering any tax, accounting, or legal advice.

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