How Health Savings Accounts Can Aid Your Retirement Planning

Though their name advertises a principal purpose, Health Savings Accounts can also be used to strengthen your retirement planning — thanks to their unique tax benefits and flexible withdrawal rules. Unlike other tax-favored accounts, HSAs offer the potential for a uniquely beneficial double-whammy: tax-free contributions and tax-free withdrawals — provided those withdrawals are used for health expenses. 

During your working years, withdrawals that aren’t used for health expenses are generally subject to ordinary income tax, plus a whopping 20% penalty tax. However, once you hit age 65, the penalty disappears, which means you can use the money for whatever you like and simply pay ordinary income tax.

Of course, health expenses figure heavily in most people’s retirement spending projections, which means you’ll likely have ample opportunity to make tax-free HSA withdrawals after you retire. That’s especially true when you consider that long-term care costs and Medicare Part B, Part D and Medicare Advantage premiums are among the many expenses that qualify for tax-free treatment. 

To contribute to an HSA, you must be enrolled in a high-deductible health plan. In 2025, that means a deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The plan must limit total out-of-pocket expenses to $8,300 for self-only or $16,000 for family coverage.  

For the 2024 tax year, you can contribute up to $4,150 if you’re single, or $8,300 if you have family coverage. For 2025, the limits are $4,300 and $8,550, respectively. If you’re 55 or older, you can contribute an additional $1,000. Like IRAs, the deadline for contributing to an HSA for the 2024 tax year is April 15. 

You can invest your HSA money in a variety of ways, from cash and money market accounts to mutual funds. If you expect to withdraw your money soon, you may not want to expose it to market volatility. However, if you’re funding an HSA with the intention of not tapping it until years later, you might take a more aggressive stance. The choice of an HSA custodian is an important one, with maintenance fees, investment options and interest rates varying widely. 

You can roll over an existing HSA to a different custodian without tax consequences. Even if you don’t want to invest your HSA in mutual funds, a rollover could still deliver a substantial boost to your returns, as some bank custodians are only paying 0.20% on HSA cash. A rollover to Fidelity’s HSA would let you use the Fidelity Government Money Market Fund, which has a 4.00% 7-day yield. 

Unlike traditional IRAs and 401k’s, HSA’s don’t have required minimum distributions. As for estate planning, spouses who are named as beneficiaries can inherit HSAs and treat them as if they were their own. In one disadvantage relative to IRAs, non-spouse beneficiaries have to immediately cash out the account and pay income tax on the balance — they don’t get to spread the withdrawals over 10 years.  

Americans had 38 million HSA accounts with $137 billion in assets as of mid-year 2024. Kentucky Sen. Rand Paul — an ophthalmologist who’s demonstrated a keen interest in lowering the cost of US health care — wants to pump those numbers up by killing the HSA eligibility requirements. In November, Paul introduced the Health Savings Accounts for All Act, which would let every American contribute to an HSA, regardless of insurance coverage or income. It would also increase HSA contribution limits, making them equal to the 401k limits — $23,500, with catch-up contributions for those over 50.