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Health Savings Account – The Most Overlooked Retirement Savings Strategy Today

Keel Point

February 3, 2021

What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings vehicle available to people with high deductible health insurance plans. While the HSA does not typically receive as much attention as some of the more popular retirement saving accounts, such as IRAs and 401(k) plans, the HSA is arguably the most powerful savings tool available.

HSAs are the only accounts that are triple tax-advantaged, which means:

  1. Contributions are made pre-tax;
  2. Investments held within the account grow tax-free; and
  3. Withdrawals for qualified healthcare expenses are also tax-free.

This year the maximum contribution amounts for HSAs are $3,600 for individuals and $7,200 for families. You can make an additional $1,000 catch-up contribution if you are age 55 or older.

How should you use it?

There are two main ways to use an HSA:

  1. You can use it to cover healthcare expenses as they are incurred, or
  2. You can use it as a long-term savings vehicle, which is where the HSA can become really powerful. To do this, you would invest the money that is in your HSA and cover your ongoing healthcare expenses out of pocket.

Why is it so important?

At its simplest level, an HSA allows you to pay your healthcare expenses with pre-tax money. This effectively means you receive a discount on the cost of your healthcare that is equal to your tax bracket.

If you plan to retire before age 65, building up assets in your HSA can be a great way to bridge the gap in your health insurance coverage between the time when you leave your job and when you become eligible for Medicare.

Many people are surprised to learn that Medicare will not cover all of their healthcare costs. According to a recent study by Fidelity, the average couple will need $295,000 for medical expenses in retirement. To that end, an HSA is the most tax-efficient vehicle available to save for these future costs and the benefits of your HSA can continue long after you turn 65.

In addition to using your HSA to help cover the cost of normal healthcare expenses in retirement, you can also make tax-free withdrawals to pay for expenses such as Medicare premiums and long-term care insurance premiums. It is important to note that if you use HSA funds for non-qualified medical expenses before age 65, you will have to pay income taxes and a 20% penalty.

However, once you reach age 65, you can withdraw money from your HSA for any reason you deem fit. Non-healthcare related distributions will incur taxes, but there will not be any penalties. This means that at age 65, your HSA can effectively act as an IRA.

Additional Tip

If you pay your ongoing healthcare expenses out of pocket, as long as you save your receipts, you can reimburse yourself for those expenses from your HSA at any time. This means that you could choose to leave the money in your HSA to allow it to continue growing tax-free and then withdraw it at a later date with no taxes or penalties.


An HSA can be a valuable component of your retirement plan. Unfortunately, many people who are eligible are missing out on the benefits. Recent studies show that only 50% of people with an HSA actually contribute to it, and only 7% of HSA owners hold investments other than cash in their accounts.

If you have questions about saving for retirement and whether an HSA might be right for you, click here to speak with one of our advisors. Or, if you’re a business owner, click here to learn about our corporate services.



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