How to Maximize Your Health Savings Account for Retirement

Updated: Sep 16, 2019



When maximized, a Health Savings Account (HSA) has triple tax advantages. HSA contributions are pre-tax/tax-deductible. The money grows tax-free and the money can come out tax free. Overall, contributing to your HSA is a great way to save for medical expenses and reduce your taxable income.


Do you qualify for an HSA?


If you are enrolled in a high-deductible health insurance plan (HDHP) as defined by the government, you can qualify for an HSA.


Each year, you can contribute to your HSA account up to the government-mandated maximums. You can use the funds on eligible medical expenses throughout the year.


This includes deductibles, copays and coinsurance, plus other qualified medical expenses not covered by your plan. Note that insurance premiums usually cannot be paid for with HSA funds.


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FSA vs HSA


Many people confuse the FSA and HSA. But the two accounts are very different. Here's the key difference...


Unlike a Flexible Spending Account (FSA), your HSA balance rolls over from year to year. Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket medical expenses.


If you use the money on non-eligible expenses, you have to pay income tax on that amount (plus a penalty if you’re under 65).


How do you get an account?


It’s common for health insurance providers to offer HSAs. If yours doesn’t have one, you can open a separate HSA account at most financial institutions.



Why max your contribution each year?


I max out my HSA each year for various reasons. If you’ve ever experienced medical bills, you know how important it is to have an emergency fund dedicated solely to medical expenses.


As mentioned, if you have a high-deductible medical plan, you may have the option to contribute to an HSA. The unused contributions can roll over indefinitely and grow tax-free.


Financial Independence Retire Early (FIRE)


Many individuals in the FIRE movement like to use their HSA as an additional retirement account. If you don’t need to tap into your HSA contributions, then you can pay for your medical bills out of pocket.


Your HSA would then be able to compound tax-free over time. When you turn 65 or are disabled, the IRS allows you to withdraw the HSA money penalty-free.


In addition, there are also no minimum required distributions at 70½ years of age like other retirement accounts.


The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, change employers or retire. Funds left in your account continue to grow tax fee.


Invest in index funds


Another benefit of HSAs is they can be invested in index funds to generate more money. This is a great way to take advantage of compounding interest over time.


Be mindful of fees


Some HSAs charge a monthly maintenance fee or a per-transaction fee, which varies by institution. While typically not very high, the fees can add up over time.


Sometimes these fees are waived if you maintain a certain minimum balance. Though it depends on your health insurance, it’s ideal to have an HSA that offers first dollar investing with low cost, high performing, reputable funds.


To the extent possible, avoid companies that require a minimum balance for investing or charge large fees.


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