An HSA as a Retirement Account?

Here's How It Works
APR 27 | 2021
A stethoscope, calculator, and a piggy bank.

Medical care in America doesn’t come cheap. A healthy 65-year-old couple retiring in 2021 can expect to  pay, on average, $662,156 out of pocket to cover their future medical expenses, even with Medicare.*

You probably already know that the familiar vehicles for savings—like a traditional IRARoth IRA or 401(k)—can help you with that big bill in your golden years. But a Health Savings Account (HSA) might get you to that target even faster.

HSAs Unique for Retirement

These one-of-a-kind accounts are often overlooked for retirement savings. But they offer some advantages you won’t find anywhere else.

How a Health Savings Account Works

If you’re covered by a high deductible health plan that satisfies certain IRS requirements, you may qualify for a Health Savings Account (HSA).

As an HSA owner, you contribute money to a specialized savings account, which is typically funded through pre-tax deductions from your paycheck. The funds may be kept in an FDIC-insured bank.

When you incur qualified medical expenses, you simply withdraw funds from your HSA to cover the cost. You have the option of paying a provider directly with HSA funds or reimbursing yourself after paying out of pocket. You can use your HSA to cover your health insurance deductible, prescription medications, hospital visits, appointments with your doctor, mental health services and more.

For 2021, you can contribute up to $3,600 to an HSA if you’re covered by a self-only high deductible health plan or up to $7,200 for family plan. Age 55 or older? You’re allowed an extra $1,000 in catch-up contributions each year.

So how does this relate to your retirement? Unlike a Flexible Spending Account (FSA), your HSA balance rolls over from year to year. So the money you contribute now may be used today, next year or 30 years down the road.

Why Consider an HSA?

Health Savings Accounts offer a number of distinctive advantages to people who own them:

First, you may be able to shift some or all of your balance into investments of your choice directly in your HSA, based on your HSA trustee’s requirements and available investment options. This means you can play the long game—investing and watching your money potentially grow for years. So when you make a withdrawal later in life, you may have more cash available to cover medical costs than you originally put into your account.

Four Reasons to Consider an HSA

  1. Investing options may be available, potentially helping to grow your money.

  2. Three tax advantages: tax deductible contributions or pre-tax in an employer’s plan, no taxes on interest or dividends and tax-free withdrawals for qualified medical expenses.

  3. HSAs can go with you from job to job and you can keep contributing as long as you have a high deductible health plan.

  4. Your employer may also add a contribution in your HSA.

Second, with an HSA you enjoy an unusual triple tax break from the federal government. You can take a deduction for contributions to your HSA, or contribute to your HSA on a pre-tax basis through your employer. You pay zero in taxes on any interest and dividends you earn. And you can make withdrawals tax-free, so long as you use the funds for qualified medical expenses.

Third, your HSA is portable. While you may need to switch insurance providers when you move from job to job, your HSA travels with you. The funds remain, and you can keep contributing, so long as you’re participating in a high deductible health plan and aren’t entitled to Medicare or other disqualifying coverage.

Finally, many businesses incentivize their employees to participate in high deductible health plans by contributing directly to employees’ HSAs. So if you opt for an HSA qualifying high deductible health plan, you might receive hundreds or even a thousand dollars in free cash from your employer. You’re still capped at the annual contribution max, but less of the money you save will be your own and more will be your employer’s.

How to Boost Your Retirement Savings With Your HSA

Can you contribute more money annually to your HSA than the actual qualified medical expenses you might incur?  Yes, the amount of your actual medical expenses does not impact how much you can contribute, which means you can save more for your future retirement years in a tax-favored account.  Here’s how:

Consider an IRA or 401(k). Your contributions are made on a tax-deferred basis, but you pay the tax bill on those funds—and their earnings over time—when you withdraw money.

With a Roth IRA or Roth 401(k), you can skip the tax bill when it’s time to withdraw, provided your withdrawal is a qualified distribution. But you pay upfront in taxes when you put money in them.


Starting at age 65, you can withdraw funds penalty-free from an HSA for any expenses. Like an IRA, it will be taxed as income.

However, when you save for future medical costs in your HSA, you get the most bang for your buck going—with no federal tax bill at any point in the process when withdrawals are used to pay for qualified medical expenses. 

Instead, you get to keep that money for yourself, watch it potentially grow and enjoy the full benefit of that cash down the road.

Don’t let future medical costs keep you up at night. While the amount you need for health care in retirement can be larger than most people realize, you can use your HSA for retirement savings, which can be a big help. And, if you start now, you may feel more confident about retirement.

Need Help Planning Your Retirement

We can help you talk over all the elements of your plan.

2021 Retirement Healthcare Costs Data Report, Healthview Services, December 2020.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.