A really long time ago… in a galaxy far, far away… I worked for a building contractor. That experience taught me that every successful building project requires the right tools. And sometimes a project turns out just a little bit better because of a specialty tool, one with specific characteristics not found in any other tool at your disposal. The same is true when building your retirement plan. There are lots of tools in the toolbox and you can construct a good, solid plan with them. But don’t overlook those unique tools that can make it even better.

The Health Savings Account (HSA) is one of those specialty financial tools. It’s often thought of as a way to pay for qualified medical expenses with pre-tax money during your working years for things like deductibles, copays, and non-covered items—in other words, things not covered by insurance. Lots of people use HSAs that way. Denevir, which offers investment services to health-based accounts, says in 2020 there were 30 million Health Savings Accounts holding approximately $82.2 billion. Almost $42 billion was contributed to HSAs in 2020.


The Rules

  • You can make contributions to an HSA if you have an HSA-eligible, high deductible health insurance plan.
  • You can make contributions to an HSA as long as total contributions don’t exceed the annual limit. For 2022 that amount will increase to $3,650 if you have an individual health plan and $7,300 if you have family coverage.
  • You can contribute an additional $1,000 each year if you are age 55 or older.
  • Contributions are deductible from gross income.
  • Any contributions made by your employer to your HSA are excluded from your gross income.
  • Money in the HSA can be invested the same as if it was in an investment account or IRA and the earnings are tax-free.
  • Distributions from your account are tax-free if used to pay for qualified medical expenses, classified as an itemized medical expense on your income tax return that isn’t reimbursed by insurance or any other source.
  • HSAs are never taxed as long as distributions pay for qualified medical expenses.
  • HSAs have no required minimum distributions.
  • Your spouse can inherit your HSA and have all the same benefits.


It’s no wonder HSAs are so popular. But Health Savings Accounts are often overlooked as a retirement planning tool even though the money in HSAs can be used during your retirement years. Here’s part of the strategy.

While you are still working, fully fund your HSA but, as much as possible, pay current medical expenses with non-HSA money. Let the HSA account balance grow.

You can’t make contributions to an HSA once you sign up for Medicare, but you can still use the money in the account to pay qualified medical expenses just like you could before retirement. But now there are additional qualified expenses like Medicare premiums, and expenses not covered by Medicare, such as dental, vision, and hearing costs. You can even use HSA dollars to pay long-term care costs and long-term care insurance premiums.

Qualified health expenses don’t have to be paid directly from the HSA to the provider. You can reimburse yourself after you’ve paid the bill. Be sure to keep receipts and proof of your payment in case the IRS or HSA custodian asks questions.

When using HSA money in retirement, qualified distributions don’t get reported as income; they are not included in modified adjusted gross income when computing whether you have to pay a Medicare surtax (penalty) for having too much income. Also, they’re not used in the calculation to determine how much of your Social Security benefit gets taxed.

HSAs can be used to manage your tax bracket during retirement. How? There is no expiration date for reimbursing medical expenses. Collect receipts for expenses you paid with non-HSA dollars and in a retirement year when you need cash, reimburse yourself for unreimbursed qualified medical expenses you’ve already paid. That way, you raise additional cash without increasing your tax bill for the year. It’s legal, and it’s helpful in a year when you might be pushed into a higher tax bracket or when your income is high enough that you have to pay the Medicare premium surtax or more taxes on your Social Security.

You can use money from your Health Savings Account for non-qualified medical expenses, but it will cost you. Those distributions get taxed because they’re added to gross income. If you are younger than 65 years old and take a non-qualified distribution, you’ll pay a 20% IRS penalty. But beginning at 65, the penalty for a non-qualified HSA distribution goes away and it becomes ordinary income, the same as if you took a distribution from an IRA.


A Health Savings Account. It’s not just for working years anymore.



This article is presented as information only and should not be considered financial, tax, or legal advice.