How Health Savings Accounts Work

HSAs and Retirement

HSAs can also be used to supplement retirement savings.
HSAs can also be used to supplement retirement savings.

A 65-year-old couple retiring in 2014 should expect to spend around $220,000 (in 2014 dollars) on out-of-pocket health care costs during retirement [source: Fidelity]. That's a serious chunk of change. Although health savings accounts are primarily marketed as tax-free ways to save money for ongoing medical expenses, they can also play a vital role in paying for expensive medical care during retirement. Especially if you've maxed out your yearly 401(k) contribution, this can be another way to squirrel away some pretax dollars.

If you start early and contribute the maximum amount to your HSA each year, you can put away $360,000 to $600,000 — depending on your rate of return on investments — to cover health care expenses during retirement [source: Carrns]. Amassing so much cash in your HSA requires making the maximum contribution for 40 years and never withdrawing a dime. That means you would need to make enough money during your working years to cover all out-of-pocket medical costs without tapping the HSA.

The same HSA rules apply for withdrawals after retirement. All HSA funds must be used to pay for qualified medical expenses. If you try to dip into the HSA account to pay for a golf outing in Hawaii, you will owe income tax on that cash, but not the 20 percent penalty. That's only for people 65 or younger [source: Carrns]. In that sense, withdrawing from an HSA after 65 is a lot like withdrawing from a traditional IRA, which is also taxed as income.

Don't forget the Medicare rule, though. Once you enroll in Medicare and start receiving Social Security benefits, you cannot make tax-free contributions to an HSA. You can, however, continue to withdraw money tax-free for qualified medical expenses, even when you are enrolled in Medicare.

To really make your money work for retirement, you will need to shift the majority of your HSA funds out of liquid money market-style accounts and into investments. Before you invest in mutual funds or other securities through your HSA, make sure to find out if the bank charges transaction fees for investments along with any ongoing maintenance fees for the account [source: Carrns]. These fees can really eat away at your savings. A website called HSASearch provides fee information on all U.S. HSA providers.

For lots more information on retirement planning and managing health care costs, check out the related HowStuffWorks articles below.

Author's Note: How Health Savings Accounts Work

Writing about financial planning is not a natural fit for me — just ask my wife, the family budgetmaster — but I always learn a tremendous amount in the process. I admit that I really knew very little about health savings accounts before starting my research for this article, but now I'm convinced it's the perfect solution for us. As a freelance writer, I pay for my own health insurance coverage. To keep premiums affordable, we go with a high-deductible plan. Adding an HSA to our financial mix would provide a nice tax-free buffer for any unplanned trips to the emergency room. Maybe this newfound expertise will even raise my wife's opinion of my financial prowess. A man can dream, can't he?

Related Articles


  • Carrns, Anne. "Shopping for Investments in a Health Savings Account." The New York Times. Dec. 11, 2013 (Oct. 17, 2014)
  • Carrns, Anne. "Using Health Savings Accounts to Invest for Retirement." The New York Times. Aug. 19, 2014 (Oct. 17, 2014)
  • Federal Reserve Bank of St. Louis. "Personal Saving Rate" (Oct. 17, 2014)
  • Fidelity. "Retiree health costs hold steady." June 11, 2014 (Oct. 17, 2014)
  • Internal Revenue Service. "Publication 969" (Oct. 17, 2014)
  • Kaiser Family Foundation. "Employer-Sponsored Family Health Premiums Rose 3 Percent in 2014." Sept. 10, 2014 (Oct. 17, 2014)
  • Mann, Leslie. "What to know before investing in an HSA." The Chicago Tribune. Jan. 31, 2014 (Oct. 17, 2014)
  • National Business Group on Health. "U.S. Employers Changing Health Benefit Plans to Control Rising Costs, Comply with ACA, National Business Group on Health Survey Finds." Aug. 13, 2014 (Oct. 17, 2014)
  • Waldrop, Sharon Anne. "How to Get the Most Out of Your Health Savings Account." Forbes. Aug. 27, 2013 (Oct. 17, 2014)