I’m making a bold statement today: An HSA is the absolute best retirement account.
Not taking full advantage of an HSA – or Health Savings Account – can be a costly mistake for those who are in the financial position to contribute to one.
There is a general lack of information about the advantages that HSAs offer. I often hear financial “gurus” give people advice such as “invest in an IRA” or “contribute more to your 401(k).”
While this in and of itself is not bad advice, I think it’s tragic how few are being advised to max out their HSA contributions. It’s a practical thing people can potentially drastically improve their finances over time.
Understanding what an HSA Is
Many people do not even know what an HSA is or how it works. Health insurance plans that have an HSA component allow individuals to contribute money pre-tax into their HSA. In 2023 the HSA contribution limit is $3,850 for an individual and $7,750 for a family.
Once you have deposited money into your HSA account you can use it tax-free for qualified medical expenses. Qualified medical expenses are listed in IRS publication 502, at a high level they include practically any doctor visit, medical bill, or prescription. Recently eligible expenses have been expanded further to include things such as a carpal tunnel glove and sudafed. Many vision and dental expenses fall under this category as well. As you can see, HSAs have huge tax advantages when used for medical costs.
Besides lowering your taxable income, depositing money into an HSA has the dual advantage of creating a medical emergency fund. As long as you are regularly contributing to your fund, you will never have to worry about whether you have the money to cover health expenses.
Why an HSA is the Absolute Best Retirement Account
Now that we’ve established the benefits of contributing to an HSA – that you can pay for eligible medical expenses tax free – I want to focus on why I think it’s the best retirement account out there.
First it’s important to realize that you will never lose the money in your HSA for not spending it within a certain time frame. This is an important difference between HSAs and FSAs (Flexible Spending Accounts). With an FSA there is a “use it or lose it” aspect to it, where you lose whatever you don’t spend within a calendar year.
Not the case with HSAs. Once you contribute dollars towards your HSA, they are available for you until you use them, even if you use them decades later.
With that in mind, it’s important to think of an HSA as a retirement account.
- Invest your Funds
Once an HSA exceeds $2,000 (or whatever the HSA administrator allows – in some cases the threshold is as low as $0) the owner of the HSA can invest whatever is above the $2,000 floor. That means if your balance is at $5,000 you can invest $3,000 in mutual funds. I just did this recently and told a number of people about it. None of them knew you can invest your HSA funds.
Even better, the gains on investments are not taxed if withdrawn and used for a qualified medical expense. This is why an HSA is often referred to as having a triple tax advantage.
- Like a traditional IRA, but Better
An HSA is like a traditional IRA in almost every way. The biggest difference is that people are able to withdraw the money tax-free for qualified medical expenses.
When you think about it, would you rather have money in a retirement account that does not allow you to withdraw for any reason without a tax penalty or would you rather have your money in an identical account that allows you to withdraw money tax-free for medical purposes?
- Employer Match
Many employers will encourage employees to contribute to their HSA account by offering a matching contribution amount. Typically this will be in the $500 range for individuals and $1,000 for families.
- You can Still Contribute to other Retirement Accounts
Another perk of an HSA is that it gives you another opportunity to take advantage of the tax benefits that other retirement accounts take advantage of. IRAs and 401(k)s have contribution limits, but in no way does HSA contributions count against those limits. Instead, an HSA is just one more way that people can save for retirement.
The many advantages that come with contributing to an HSA, including advantages that even traditional retirement accounts lack, it’s clear to see why an HSA is the absolute best retirement account.
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I wish my employer would match HSA contributions! I admit I haven’t been using my HSA, but I probably should. We are fortunate in that we’re pretty healthy and don’t have many medical expenses every year (probably less than $100 in co-pays and the odd prescription), but I realize it would probably be wise for me to toss money into my HSA anyway. Thanks for this reminder!
I think the HSA is an awesome employee benefit and frequently advise clients to choose the high deductible insurance plan just so they can get access to the HSA. My only long term concern is if the government changes the regulations around HSA’s because the withdrawals are not as actively monitored as an FSA, but until that time, I am a big fan.
Way to inform everyone in this post, DC. “There is a general lack of information about the advantages that HSAs offer.” <– I think this is the biggest problem when it comes to health care in general. I LOVE my FSA but so many of my coworkers don’t use it because they don’t want to take the time to learn about it. (In my situation, there is no employer match for anything – womp womp.)
We have an HSA as well as it’s just a no-brainer not to, especially with being self-employed. I have a similar concern as Shannon does, but is by no means holding us back from maxing ours out each year. We may lose the ability to have one though if we switch to a health care sharing ministry which is unfortunate, but haven’t decided on that yet.
I’m going to have to try HSAs. I’ve heard way too much about them lately to not do so. It seems like they really are the best protection for your money.
My company is self-insured and offers some interesting health plan options. When I determined which was best for my family, it wasn’t the option that included the HSA, but I’ll have to revisit that again this year. I think I’m in a unique situation though and generally tell people they should at least look into it.
I don’t have a an HSA, since none of my health insurance options gives me that choice. I have heard that it is a great place to put your money. You mentioned that it lowers your taxable income…is that only if you use it for medical expenses? I have a flex spending account which is nice, but you can’t carry the money over and you have to decide a year in advance how much money you’ll spend so it’s hard to plan and I don’t contribute a lot. I do have a Roth IRA which I should contribute more to. You are allowed to withdraw your contributions without penalty at anytime from my understanding…it’s the earnings that would be penalized and taxed if withdrawn. There are also certain circumstances where you won’t be penalized like $10k for first time homebuyer, and a few others…
When the HSA first became available at my employer I took advantage and maxed it out for the past 4 years. However during those 4 years I had two children and the medical expenses have reduced my account to around $3k. Building it back up now. Hopefully no more kids :) and fewer doctor visits. The downside to an HSA is that you are on a high deductible health care plan and for me that means the first 4k of my medical is paid from my HSA. I almost always hit that limit each year with the kids.
I don’t know if my new insurance that I had to buy has that option, but if it does I’ll look into it. Seems like a win/win. Do you have to contribute a certain amount each month? The only downside of that for me is when and if I have a bad month income wise.
No you don’t. You can contribute in a lump sum if you wish – the contribution just has to be made by the tax filing deadline (usually April 15 if not late filing).
Mrs. Frugalwoods Health actually is only a small reason why you should be putting money in your HSA (in my opinion). It has huge tax advantages – even more than a 401k or IRA – and if you have no medical bills you can invest 100% of your contributions!
blonde_finance Yes, there is always a risk of regulatory change down the road. I think based on the relatively low number of people who seem to know about the benefits of an HSA I doubt the government would change the rules so people are LESS inclined to contribute, though.
theFinancegirl Thanks, happy to share my knowledge. I think an FSA is a bit different, though? It’s a “use it or lose it” from my understanding? Still not a bad thing to take advantage of but just not as favorable as an HSA.
FrugalRules it’s interesting that you and Shannon are both concerned about the government making changes so that the HSA is LESS desirable to contribute to. I think the government (or government officials, I should say) love the HSA and if anything they’d make it more desirable to contribute to.
MoneyMiniBlog They are a great way to invest, better than any other retirement account imo. It’s relatively easy to max out so I always encourage people to invest as much as they can in their HSAs each year.
Mark@BareBudgetGuy Yes, it depends on your individual situation. I can’t think of any negatives to the HSA, though, because it has such big benefits regardless of whether you have doctor bills or don’t have doctor bills.
Andrew LivingRichCheaply No it lowers your taxable income regardless of whether you spend the money or not. You’re right about the FSA not being as good as the HSA, and the “use it or lose it clause” with FSAs make them really undesirable imo. But if you don’t have the choice to use an HSA I suppose it doesn’t apply to your situation. I think you’re smart for contributing to a Roth IRA, though.
Derrick_Horvath That’s true, the high-deductible nature of the plan is a negative. At the same time most employers are moving towards high deductible plans so I just hope people become aware of the value of contributing to an HSA so they get started on the right foot.
Beachbudget No you can contribute whenever you want. With employer plans it just makes sense to have it taken out of your paycheck, but you could write a check for any amount at any time (up to the yearly maximum, of course).
I could be wrong about this, but it seems like by contributing to my HSA has also reduced my tax liability, too. I directly deposit into my HSA from my paycheck (set up through work), so I guess it could be after-tax, but whatever. Hands down, it’s THE BEST thing ever, and I get a $500 match from my employer. Plus, contact lenses are hella expensive so I like to feel like I’m getting them for free… Plus investing!!! How do people not know about that?!
Thanks for the summary, DC!
You are absolutely right that there is so much confusion around HSAs and too many people haven’t heard of them. One of the biggest misperceptions I run across is people believe it is a use it or lose it account, which can scare some people off from investigating further. I wish more people were aware of the benefits of them so they could better utilize them as part of their overall financial plan. Because, as you noted, the benefits when it comes to paying your medical expenses is significant. Great post, DC!
I’ve never had the option for a HSA with my health insurance plans, but I’m keeping my eye out for one in future jobs! We’ve had a FSA, but I’ve been super cautious with that since you lose the money at the end of the year if you haven’t spent it.
I’m glad you wrote this article. I was thinking about opening an HSA but I didn’t fully understand the concept. I’m probably going to switch to one next year.
I’ve had an HSA account with my insurance for 2 or 3 years now. I knew that I could invest some when the number got high enough, but I haven’t been able to put enough into the account to get to that point. My employer puts in $1000 for my family insurance plan, so that is pretty sweet. Once we get debt free, I am planning on being able to put more into this account, especially after reading about various bloggers using it as a retirement fund. When I first got the HSA account, our HR representative said that whatever you don’t use rolls over and can sit there until you are 65 to be withdrawn tax free, but I just haven’t worked on putting a lot in there yet.
Beachbudget No, it’s just like a 401(k) where you can change your contributions anytime throughout the year.
I’ve even seen financial websites talk about flex and HSA plans like they are the same thing. I think maybe HSA’s are not widely promoted because not everyone has one available to them, but maybe if they were promoted more, people would try harder to get them. I plan on maxing mine out every year as long as we are eligible to have one.
I actually have to sign up to Obamacare this week so I’ll see if any plans include! Tons of early retirement bloggers rave about the HSA for sure. And I’m pretty sure there’s some hack they do to convert it later on if needed (ie if you never use for medical) but I could be wrong… All I know is that you’re right – it’s a great tool to consider! And even personal finance bloggers like me admittedly don’t know much about it until we read on our friends’ sites! ;)
BudgetsAreSexy I don’t really know if you need a “hack” if you don’t use it for medical expenses. It literally functions the same as an IRA account! You can withdraw from it the same as you can withdraw from an IRA in retirement.
I don’t think I would have known about it as early as I did if I didn’t 1) work in the health care industry and/or 2) have surgery two years in a row. It forced me to fully understand how my HSA works. So don’t feel bad, but I hope more people become aware of what an awesome personal finance tool it is.
sunburntsaver No, actually it’s before tax regardless of when the dollars actually go into your account because come tax time there is a section of your tax return where you enter how much you deposited into your HSA (forgot the form name/number, but the HSA administrator should send you one around tax time). But if it does come out of your paycheck your employer will put it in the “pre-tax” section so that the correct taxes are taken out.
Thanks for the kind words! But yes, I can’t imagine EVER paying full price for qualified medical expenses – contacts included!
DC @ Young Adult Money
Ahh….. so you’re saying you can pull from it anytime you want in
retirement, and for whatever you want? But for medical expenses you can
pull anytime you need before retirement? (Contributions and earnings?)
If
so that’s pretty good indeed! I guess I was always under the impression
it *always* had to do with medical – even in retirement (which, btw,
I’m sure will be a top expense anyways so maybe it doesn’t matter by
then – hah)
pfjenna The trend has been towards high deductible plans (for better or for worse), so I’m sure you will eventually have the option of choosing a plan with an HSA. The FSA has it’s benefits, but the “use it or lose it” clause is terrible imo.
ShannonRyan Thanks Shannon! I think it’s really unfortunate how little people have heard about the benefits of HSAs. I think people in their 20s who are “healthier” (I put that in quotes because many expensive medical conditions are unexpected and unavoidable) are at a huge advantage if they max out their HSA. Not only will they build a large medical emergency fund but they also will be putting away money for retirement. A win-win in my opinion!
Jason @ The Butler Journal Good to hear, Jason! Besides the fact that they do come with “high deductible” plans that can hurt a little if you do need surgery (trust me, I had surgery two years in a row!), the tax savings from an HSA among other benefits makes it a really desirable way to save money for retirement and health emergencies.
BudgetsAreSexy DC @ Young Adult Money Exactly! That’s exactly how it works! It’s treated the same as a traditional IRA. But yes, you can take out money for qualified medical expenses ANY time from your account with no tax and no penalty. It’s the best place to put your money imo…or at least second to the amount you put into a 401k that an employer matches. Nice thing is a lot of employers are matching HSA contributions these days.
Haha yes talking to my grandparents it sounds like it’s best to save as much as possible for potential medical bills in retirement.
becbier07 I hear you, I had surgeries two years back-to-back and then my wife had surgery the year after that, so I definitely have spent a lot on medical bills but thankfully got a good discount by funneling money into the HSA to pay all the bills. The limit on my plan is $2,000, so once you are past that you can pick from a wide variety of options to invest in.
Eyesonthedollar I think HSAs will become more widely available as options to employees as high deductible plans become the norm. But you are right, FSAs and HSAs are nowhere near similar so I hope people learn about the differences.
DC @ Young Adult Money you’re my new best friend.
BudgetsAreSexy DC @ Young Adult Money Awesome!
I love my HSA and am extremely sad that I cannot use it with the healthcare sharing ministry we are starting January 1st. I am very thankful that the money can just continue to grow for me!
One thing that isn’t mentioned but is another bonus is that if you have HSA funds taken via payroll deduction you also are not docked either SS nor Medicare taxes. This saves you another 7.65%.
Also you can have more than one HSA account and transfer funds from one with lame investment choices to another with better options.
And if you are organized enough, you can pay for medical costs out of pocket (after tax), keep your receipts , leave the money in your HSA to grow tax free and then withdrawal tax free as much as you want up to the amount you spent on qualified expenses. AFAIK there is no time limit on this. !! This could be used as an Emergency fund on Steroids
Visit the Mad Fientist’s site for even more nuts and bolts info.
Maxing out your HSA is a no brainer.
I’m not sure what I enjoyed more the HSA article or the bonding moment between YAM and Budgets are Sexy. We contribute to our HSA, receive a small contribution from the employer, this year we will focus on building it up.
fezwick Thanks for sharing some additional background and ways to fully utilize the HSA. I agree: maxing out an HSA is a no-brainer and something more people should do.
Holly at ClubThrifty That’s one of the negatives of going with a healthcare ministry, but I’m sure there are many advantages as well. I’m glad you were able to sock away some money while you had your HSA!
EvenStevenMoney HAHA yes me and J$ did have a bonding moment there. He even shared the post on his Rockstar Finance website so I am feeling the love. Good to hear that you contribute to your HSA!
DC @ Young Adult Money BudgetsAreSexy
Your article says it’s just like a Roth… I don’t think that’s true. Roth contributions are not tax deductible, but HSA contributions are. The only thing that’s the same is tax-free withdrawals for medical expenses (HSA) or retirement age (Roth).
J are you going to write about Obamacare?? HELP! I feel like ALL of the plan options are terrible!! Obamacare is modeled after Massachusett’s health care act, but Mass plans were way better before Obamacare. I don’t want any of these plans,
(Disclosure: I don’t know anything about investing…) I just happened across this article because a friend shared it. I browsed through some of the comments and didn’t find an answer to my question. Is this like a 401K in the way that it has to be offered through your employer, or is it something available to those of us who are self-employed or independent contractors? Not sure if this is an absurd question. I’ve been looking through my health insurance and retirement options lately and I’m totally lost. Then I was totally confused by the commenters that mentioned it’s not offered by their health insurance providers, so is this something I should think about before choosing one?
That is very interesting and I’m going to look into it. We don’t use
medical care at all, but that account sounds beneficial in aiming for
financial security. What is the cost of using the funds eventually for
other than medical expenses?
This was so useful and timely for me as it’s open enrollment. Time to put some of that hard earned money into the HSA and watch it grow!
TiffTiffMarie Excellent question! An HSA is offered through your health insurance. As you are probably aware, there are a wide variety of health insurance “types.” The HSA is not available on every insurance plan. If your health insurance is a high deductible plan, it’s almost guaranteed that an HSA will be offered with it. So no, it does not have to be offered by an employer. There are many plans in the health insurance exchanges that are high deductible and have an HSA component, though.
Hope that answers your question? If not please let me know and I will do my best to answer any further questions.
miramira It depends on when you use the funds. It’s similar to a traditional IRA where you WILL be penalized (something like 10%) if you withdraw before reaching retirement age. Even if you do reach retirement age you will have to report any withdrawals as taxable income, same as a traditional IRA. The only difference between a traditional IRA and an HSA is that an HSA allows you to withdraw (tax free) for qualified medical expenses.
DealForALiving I’m glad the article helped you! Best of luck choosing your plan.
DC @ Young Adult Money Does this mean one cannot open this account personally, at a bank or credit union? We don’t and never expect to have health insurance. We do have a particular account that could easily be split into a HSA and general savings, with enough in the HSA to invest. And I imagine that the employer matching would mean one couldn’t do this independently. The account I’m thinking of is one I consider to be for the extremely rare medical or dental cost, and it basically amounts to savings. If I take some money out for any reason, I require myself to deposit double the amount. I don’t know a lot about this stuff because I do everything independently as far as finance, and mostly ignore designations by others – such as naming a bank account “savings” – the vast majority of our savings is in easily accessible checking accounts in multiple financial institutions. Those are also our retirement, named so by us. Most pay next to nothing in interest, so true that I consider 1/10 percent to be “good” .
miramira DC @ Young Adult Money No you cannot open an account like this at a bank or credit union. It must be part of your health insurance. If you don’t plan on ever having health insurance then unfortunately you will also never have an HSA (unless they change the rules where anyone can open one, but I doubt that will happen).
OneWildAndPreciousLife DC @ Young Adult Money BudgetsAreSexy You’re right, I don’t know what I was thinking. In the comments I’ve been saying “traditional” IRA, as those contributions are tax deductible. Thanks for pointing that out (has been corrected). An important point, though, is that an HSA IS like a traditional IRA in the sense that you can withdraw at retirement age, even if it is not for medical expenses. So it’s like a traditional IRA, but better.
I would recommend reading Holly’s (Club Thrifty) posts about Obamacare. She’s gone through the process of analyzing plans and eventually went with a health care ministry.
Agree with this 100%. i wrote about how awesome HSA’s are last year and when I tell people about it they still balk at the idea of using a high deductible plan. If you fully contribute to an HSA for just 2 years you’ll have close to $13000. That’s more than enough to meet the deductible of any plan. And the fact that you can use it after 65 for anything is pure gravy. Great post.
thebrokeprof Thanks! Yeah I think there are a few of us who really “get” HSAs, and then there’s a wide range of other opinions from complete lack of knowledge to “kind of” understanding them. Once you realize the full benefit that HSAs offer you won’t think twice about maxing them out every year.
FYI, many HSA accounts let you invest your funds at any point. I have only had my HSA for a short period of time. With only $600 in the account I was able to transfer half of that into an investment account and invest it. I kept the other half in the HSA in case I needed it for medical expenses.
Also, you can use the HSA to reimburse yourself. So if I have 50% of my $2600 HSA invested, and I need to pay my deductible, obviously the full $2600 isn’t available. So you can pay with a credit card, etc. and then withdraw funds from the HSA to reimburse yourself later on (anytime within the year). This is a useful feature because it can take up to 2 weeks in some cases to get your money from investments to the HSA.
r3dt4rget You are correct, the ability to reimburse yourself later on is a great option. My HSA has a minimum required balance of $2,000 before you can move anything to the investment portion of the HSA.
I’m super lucky – my employer contributes to my HSA as part of our benefits plan! I love my HSA and definitely plan on investing as soon as I surpass the $2000 mark.
Do not forget, if you are over 55, you can add another $1,000. I max out my 401K and HSA. I do not think there is a time limit for reimbursing yourself either. Expenses you paid in 2014 can be paid 20 years later when you retire (maybe…)
thebrokeprof How do you get $13,000 for two years if the maximum per year is $3,300?
wijayapala2 thebrokeprof I’m assuming they are married.
No Nonsense Landlord That’s a great point! It’s great that there isn’t a time limit for reimbursing yourself, but I like to keep it simple by using the check card linked to my HSA. No need for reconciliations, then.
LisaVsTheLoans My employer contributes either $500 or $1,000 a year (can’t remember – shame on me). It’s just another reason I love being a full-time employee versus someone who freelances or consults as a full-time job.
I am pretty sure that you DO lose your HSA where I work if you don’t use it….Is that possible?
I’d like to point out one other nifty trick you can use to leverage HSA’s. PAY ALL YOU MEDICAL BILLS WITH A CREDIT CARD, this allows you to either earn 1% cash back or point/miles, you then withdraw the exact amount from your HSA and put it into your own bank account. BOOM, you just saved another 1% on your medical expenses on top of paying it all with pre-tax money.
A follow-up column on this would be great, including links to some recommended HSAs, do you have to open by year-end, etc.
I appreciated this. Hadn’t really thought about it, but it’s perfect for me.
Hi Marianne! Thanks so much for the feedback. Just made note of a follow-up article.
I’m glad you found this useful. I love sharing about HSAs because I think they benefit both people with high medical costs (tax-free medical bills, essentially) and low medical costs (medical emergency fund, secondary retirement fund, etc.).
Hi David,
What if your organisation doesn’t offer an HSA? I don’t want to do the FSA because you lose it if you don’t spend it. Can you open one privately?
Hi Onyk,
It all comes down to what health plan you have. If you have a High-Deductible Health Plan (HDHP) you are almost certainly eligible. If your employer doesn’t offer one through their benefits, but you have a HDHP, you can open an HSA on your own. Here’s eligibility requirements to open one on your own: https://www.optumbank.com/individuals-families/hsa-eligibility.html.
David, I appreciate you writing this article. I too am a big fan of health savings accounts. Having worked in healthcare finance for over a decade, I know first hand how quickly medical costs can rise and if you’re able to build up a nice chunk of change for that rainy day (because it will happen) it takes a huge burden off of the patient.
There are some instances where I would not advise enrolling in an HSA, but that is usually for specific situations. For most young healthy individuals, they should absolutely choose a high deductible health plan with an HSA!