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4 ways to use an HSA in retirement

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A health savings account or HSA:

  • lets you put away pre-tax money to pay for qualified health expenses,
  • can only be opened while you are working and if you have a high deductible health plan,
  • has current plan limits of $4,150 per year for individuals (and $8,300 for families), and
  • includes a yearly catch-up contribution from age 55-65 of $1,000 per year.

Saving for your retirement is like putting together a really complex, expensive puzzle. Just to cover the basic expenses, for example, you’ll need a retirement income of about $50,000 a year.1 (That doesn’t even include retirement health care costs.)

One retirement savings puzzle piece that often gets overlooked? A health savings account (HSA). Here are four things to consider when using your HSA for retirement.

1. Let your funds grow and use an HSA for qualified health care expenses.

With some planning and if you don’t need the funds to pay for expenses while you’re working, you can start to think differently about your HSA. “The real power in an HSA is its compounding and growth,” says Sri Reddy, senior vice president of retirement and income solutions at Principal®.

Image showing that 68% is the total health care costs retirees can expect to be covered by Medicare.

Let’s say you open an HSA when you’re 40 and save the maximum per year, including the catch-up contribution starting when you turn 55. You’re also able to treat your HSA like a true retirement vehicle and pay for medical expenses with other funds in your budget.

Invest your HSA funds and watch the earnings compound.

When you are … ... you save this amount each year in an HSA ... for this many years ... to equal to this total deposit
40-54 $3,600 15 $54,000
55-65 $4,600 10 $46,000
Total deposits plus growth of all HSA funds when you turn age 65* $217,000

*These scenarios are hypothetical and assume an annual return of 6%.

When you retire, you can use those HSA savings for a range of qualified health care expenses, including:

  • IRS qualified health care premiums for Medicare Parts B, C, and D,
  • Medicare deductibles, co-pays, and co-insurance,
  • qualified long-term care insurance premiums,
  • dental and vision expenses,
  • hearing aids,
  • insulin and diabetic supplies, and
  • over-the-counter medicine and medical equipment and supplies.

Graphic of a thumbtack. Tip: You may have a debit card that’s tied to your HSA to pay for expenses. However, says Reddy, you’ll pay fees when you use the card, and you still submit receipts for qualified expenses. Instead, think about paying for the health care expenses with something like a rewards credit card, then reimburse yourself after you submit receipts.

2. Use HSA tax advantages in retirement.

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA. But an HSA comes with a couple of retirement tax advantages. “If you don’t end up using it before retirement, an HSA behaves, taxation wise, no differently than a 401(k),” Reddy says.

  • Distributions are tax- and penalty-free if they’re for qualified medical expenses (PDF). (Keep your receipts!)
  • Distributions aren’t included in modified adjusted gross income. They won’t affect retirement-related taxes such as the Medicare premium surtax or Social Security benefits.

3. Use your HSA to cover other expenses in retirement.

Age 65 is also when you can use HSA distributions to pay for nonmedical expenses. Those payouts aren’t tax free but are taxed at the same rate as distributions from a traditional IRA. So if you don’t need the savings for medical costs, you can use the funds to cover unexpected budget items, for example. And unlike Social Security or required minimum distributions (RMDs), there’s no age by which you’re required to use HSA funds.

4. Plug your HSA into your estate plan.

Just like a traditional IRA, when you set up an HSA, you name a beneficiary who receives any unused funds after you die. If the beneficiary is your spouse, they’ll receive the tax benefits, too.

Get your full retirement picture

If you have a 401(k) with Principal, log in to view your Retirement Wellness Planner. You’ll have the option to add your HSA account so it’s calculated into your wellness score, giving you a better picture of your total savings for retirement. First time logging in? Get started.