HSAs: An overlooked retirement savings tool
It’s only natural to think of an HSA as a way to save for future health care costs. But it’s also a powerful investment tool that can help you meet retirement saving goals:
- Once you turn 65, you can continue to use your HSA to pay for qualified medical expenses tax-free, helping keep your other retirement accounts for other needs.
- Plus, in retirement you can also use your HSA investment account to pay for any type of expense. You just have to pay ordinary state and federal income tax on nonqualified medical expenses.
An HSA allows for more tax benefits than other retirement accounts
An HSA gives you triple tax benefits, making it an effective way to build savings as opposed to other retirement accounts:
- The money you contribute to your HSA is tax deductible up to IRS limits.
- Any money you take out to pay for qualified medical expenses is income tax-free.
- If you invest a portion of your HSA funds, earnings grow income tax-free.
An HSA offers benefits now and well into the future
Using your HSA before retirement
Your HSA offers many benefits, including using it as a retirement health savings account. For help estimating health care costs in retirement, use our health savings checkup tool. You’ll get personalized results in just a few minutes.
Pay for qualified medical expenses
Before retirement, your HSA dollars are available to you, your spouse and eligible dependents, even if they’re not covered by your health plan. Use your funds to pay for qualified medical expenses, including:
- Doctor visits
- Dental and vision care
- Prescription and some over-the-counter medications
- Chiropractic and acupuncture services
- Hearing aids
Investing HSA funds
The money you contribute to your HSA goes into a deposit account, also called a cash account. When you reach a certain balance, you can put money over that amount into an HSA investment account, giving you the opportunity to grow those savings over the long term. Investment options include self-directed mutual funds or digitally managed investments from Betterment.
Using your HSA after retirement
Once you reach retirement age, you can use your HSA to pay for qualified medical expenses, including deductibles, copays, coinsurance and long-term care services. Note that you cannot use your HSA to pay premiums for all types of health insurance coverage.
Nonqualified medical expenses
After you turn 65, you can also use your HSA to pay for any type of non-medical expense, from home improvement and travel to charitable donations and more. Just remember that you will be required to pay state and federal taxes on nonqualified distributions.
Beneficiary’s use of your HSA investment
An HSA beneficiary is someone who inherits the funds in your HSA after you die. How the HSA investment can be used depends on who the beneficiary is:
- If the beneficiary is a spouse, the HSA becomes theirs and the rules regarding qualified expenses apply.
- If the beneficiary is not a spouse, that individual must pay income tax on the value of the account minus any qualified expenses incurred within a year of your death.
- If the beneficiary is your estate, the value of your HSA will be reported on your final tax return as taxable income.
- If the beneficiary is a charitable organization, it will receive the value of your HSA after income taxes are paid on the distribution.
Frequently asked questions about HSAs and retirement
You currently have diverse investment options for your HSA, including self-directed mutual funds and digitally managed investments from Betterment. You can choose to invest based on how experienced you are and how involved you want to be in selecting your investments.
I don’t want to spend a lot of time managing my portfolio. Can I get help?
Yes, you can choose to have Betterment manage your investment funds. Betterment is an independent online investment advisor that combines low-cost, tax-efficient investment strategies with technology and personalized advice to help you pursue your financial goals.
Once you answer a few brief questions about your investment goals and priorities, Betterment will build a personalized portfolio of exchange-traded funds with investment mixes and risk levels that are suitable for you.
I have some investment experience and prefer mutual funds. Can I choose my own investments?
You may choose from among a number of preselected mutual funds from nationally recognized fund families. These have been selected to offer a broad and diverse range of investment objectives, with high Morningstar ratings and some of the lowest expense ratios in the industry.
Read the fund’s prospectus carefully before investing. It contains information about a fund’s investment approach and management fees. Links to a prospectus and Morningstar report are provided for each mutual fund on your mutual fund investment page, so the information is at your fingertips.
No. You can open and contribute to an HSA at age 65 or later as long as you meet HSA eligibility requirements:
- You’re covered on an HSA-qualified medical plan.
- You’re not a tax dependent of someone else.
- You don’t have any conflicting coverage (including enrollment in Medicare). Turning age 65 does not, in and of itself, preclude you from remaining HSA-eligible absent any disqualifying coverage.
Yes. Once you turn 65 or meet Social Security’s definition of disabled, you can take distributions for items that aren’t HSA-qualified without incurring the 20% additional tax (penalty) that is otherwise assessed on nonqualified medical expenses.
However, distributions for noneligible expenses are included in your taxable income, putting these withdrawals on par with taxes on distributions from a traditional 401(k) or traditional IRA.
Yes. Medicare doesn’t offer an HSA qualifying option. You can’t make contributions to your HSA for any months after you enroll in any part of Medicare, even if you’re also covered on an HSA qualifying plan.