Are Health Savings Accounts the Ultimate Retirement Savings Vehicle?

For thoughtful retirement savers, minimizing your lifetime tax bill is a key consideration. This is why we see so many savers utilize accounts like traditional IRAs, Roth IRAs and 401(k) accounts. However, there is another account that has the most favorable tax treatment that often gets overlooked, the Health Savings Account (HSA). In this post, we will discuss the reasons why HSAs are a compelling retirement saving option and some factors to consider when using these accounts.

The purpose of an HSA is to provide a savings vehicle to pay for medical costs. If the funds contributed to the account are used for certain medical expenses, an investor receives a triple tax advantage by using this account:

  • The funds are not taxed when they are contributed.
  • The funds grow tax-free.
  • Distributions from the account are also tax-free if used for qualified medical expenses.

Qualified medical expenses include items such as doctor’s office visits and copays, prescription and over-the-the counter drugs, dental treatments, eyeglasses, long term care policy premiums and certain Medicare premiums. Importantly, your standard health care insurance premiums do not qualify (assuming you are employed).

However, what you may spend the funds on could be basically anything, provided you have receipts for prior qualified health expenses that offset the amount of the withdrawal. The receipts must be from after you started your HSA account and they can only be claimed once. As long as you are able to meet these conditions, you could use funds from an HSA for a home project, a new car or college expenses.

The triple tax advantaged status afforded to HSAs makes them even more powerful than traditional retirement savings options like a 401(k) plan, traditional IRA or Roth IRA. For all those accounts, taxes are either paid when the funds are distributed from the account or when they are contributed. HSAs avoid this layer of taxes if certain rules are followed.

There are certain requirements that must be met to contribute to an HSA account. You must have a high deductible health plan (HDHP) and you must not be enrolled in Medicare. To be a HDHP, your plan must have the deductible indicated in the table below.


It is also important to note the requirements that do not have to be met to contribute to an HSA. HSAs do not have income limitations, meaning even high earners can contribute to this plan. The deduction does not phase out or go away. Also, there is not a requirement that you have earned income to be able to contribute.

After age 65, distributions from an HSA are not subject to a penalty regardless of what the funds are used for. However, distributions not used for qualified medical expenses are still taxable. Thus, the HSA functions similarly to a traditional IRA.

To get the most out of this account for retirement savings purposes, there are some key guidelines to follow:

  • Max out your contribution. The current limit is $3,600 for single filers and $7,200 for families. To the degree you are able to, max out your contribution to get the most dollars you can into this account.
  • The account needs to be invested. If the account is left in cash, the growth of the account may be limited over the long-term. To grow your HSA, you should invest in a mix of stocks and bonds that you are comfortable with and that will allow the account to grow.
  • Cover medical expenses with cash on hand. By paying for your expenses out of pocket, you allow the funds in the HSA to continue to grow. This requires that you have enough cash flow to be able to cover these medical costs.
  • Find a good HSA provider. Make sure that the provider of your HSA account charges reasonable expenses and has strong investment options.
  • Keep track of medical expenses. To be able to be reimbursed for prior medical expenses, it is extremely important to keep detailed records of your expenses.



Despite its attractive tax attributes, HSAs are very under-utilized as a retirement savings tool. In 2020, only 9% of HSA accounts were invested. As long as you have adequate cash flow, investing in an HSA account is compelling option to save for retirement. If you would like to talk to a financial planner about the right steps to invest for your retirement, please schedule a call here.