How to use a health savings account (HSA) for retirement

A health savings account (HSA) can be a valuable way to cover medical costs throughout your life. But did you know that HSAs can be used for more than medical expenses once you turn 65? They can become an additional source of funds you can tap during retirement.

When combined with traditional retirement accounts, like a 401(k) or IRA, using an HSA for retirement can give you and your family the added flexibility and security you need. Let's look at HSAs for retirement in more detail.

An HSA is a health savings account for qualified medical expenses that comes with several tax advantages. They're available to people enrolled in a high-deductible health plan (HDHP).

• For 2024, HDHPs have a minimum annual deductible of $1,600 for individuals and $3,200 for families.
• For 2025, the minimum annual deductible increases to $1,650 for individuals and $3,300 for families.

If you're enrolled in Medicare or other health coverage not allowed by the IRS, you may be ineligible for an HSA. This could include certain prescription drug plans, flexible spending accounts or health reimbursement arrangements.

HSA contributions are tax-deductible or automatically deducted from your paycheck if you have one through an employer. But there are annual contribution limits.

• In 2024, an individual can put in $4,150, while families can contribute up to $8,300.
• In 2025, the individual limit is $4,300 and the family limit is $8,550.

HSAs are one of the most tax-efficient ways to save, with tax-free contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. This triple tax advantage makes an HSA an effective tool beyond saving for near-term medical expenses. Investing some of your HSA funds for the long-term can mean significant growth, leveraging compound returns to support your future and that of your loved ones.

You can invest HSA funds similarly to how you invest with a retirement account. But, because your HSA is primarily for current and future medical expenses, you may not want to take on as much risk.

Consider leaving some of your HSA as cash and explore conservative investments such as money market funds and bonds. If you have a hefty HSA savings cushion and want to take on more risk, assets with greater growth potential, like index funds or mutual funds, could be a good fit and help you build and leave a legacy.

HSA distributions for qualified medical expenses are tax-free at any age. The IRS defines a qualified medical expense as any cost to prevent, diagnose or treat a physical or mental ailment. Ineligible expenses incur an income tax plus an additional 20% penalty.

However, if you have a disability or are 65 or older, you can withdraw from an HSA for any expense penalty-free, though you'll still pay income tax. But the ability to save for a variety of needs can ensure you maintain your quality of life in retirement.

You can use an HSA for health insurance premiums after retirement, which can act as a bridge if you're ready for retirement but don't yet qualify for Medicare. Here are some of the premiums that may be eligible as HSA medical expenses:

• Long-term care expenses. Get coverage up to a limit based on your age. For example, people ages 61 to 70 can include up to $4,710 as a qualified medical expense for 2024.
• Continuing coverage. Pay for coverage through an employer group plan, like COBRA.
• Coverage during unemployment. Health coverage you receive while collecting federal or state unemployment benefits may be eligible.
• Health coverage after age 65. HSA money can cover most health coverage once you're 65, except for a supplemental Medicare policy, like Medigap.

Planning for health care costs in retirement

Not only can health care in retirement be expensive, it can be complicated to navigate and easy to miss some important considerations. As you think about what you need to plan for, check out these common blind spots regarding health care in retirement.

Read more

Once you retire, you have much more flexibility with your HSA funds and can do more to make sure you and your loved ones are cared for. Here are a few ways to use your HSA to your advantage.

Health care costs will likely be a top expense in retirement. Unless you can pay out of pocket, expect to use more of your HSA funds for:

• Health exams.
• Copays.
• Diagnostic tests.
• Prescription drugs.
• Treatments.
  

Long-term care refers to services for those who are chronically ill and require significant assistance or supervision throughout the day. These expenses can be hefty. The average costs of long-term care in the U.S. ranged from $24,700 to $116,000 in 2023, according to Statista.

After age 65, your HSA can fund long-term care services, such as in-home or residential caregiving and medical services, with no penalty.

After age 65, you can use your HSA for any expense penalty-free, though taxes will apply. Some of these non-medical expenses might include:

• Travel with loved ones. Exploring new places or revisiting your favorites can add perspective and adventure to retirement life.
• Give more to charities. Consider increasing donations to the organizations that mean the most and continue your legacy of generosity.
• Start a business or side gig. An HSA can provide the funds to turn your passion into a business that ignites a second act and benefits your community.
• Make home improvements. Renovations that make your home more accessible can allow you to enjoy retirement more and increase your home's value.
  

Unlike with traditional retirement savings accounts, you don't have to take distributions from an HSA at any age. You can let the money sit and pass it to loved ones once you die.

• If your spouse is the beneficiary: Once your spouse inherits the HSA, it becomes their HSA, and the same qualified medical expense rules apply.
• If a non spouse is the beneficiary: Any other individual listed as a beneficiary will receive the value of your HSA when you die. The beneficiary will pay an income tax on the value minus any qualified medical expenses incurred within a year of your death.
• If your estate is the beneficiary: The value of your HSA is reported on your final tax return as taxable income.

You may also choose to list a charitable organization as the beneficiary of your HSA and continue giving long after you're gone. Similar to a beneficiary who is not a spouse, the organization will receive the value of your HSA after you pay income taxes on the distribution.