What happens to HSA when you retire?

Find out what happens to HSA when you retire, and the various ways you can use your HSA money in retirement.

3 min read

When you think of a Health Savings Account (HSA), you may assume it is solely designed to cover your out-of-pocket medical expenses such as prescriptions and doctor appointments. However, an HSA can be an effective tool for retirement planning. 

If you retire at age 65 or older and you are on Medicare, you won’t be eligible to contribute to the HSA. However, you will be eligible to use the HSA balance for qualified medical expenses. If you are below age 65 when you retire, you can use the HSA money to pay for qualified medical expenses. You won’t pay taxes or penalties on qualified medical expenses.

What is a Health Savings Account?

A Health Savings Account is designed for people with high-deductible health plans (HDHP) to pay out-of-pocket medical expenses. To be eligible to open an HSA, you must be covered by an HDHP plan, which often costs less than a standard health plan.

HDHPs are designed to cover major expenses such as surgeries or medical procedures that require hospital stays. You will pay more money for out-of-pocket medical expenses to cover routine costs up to the higher deductible. However, an HDHP does not provide full coverage for routine healthcare expenses such as prescriptions and doctor visits.

How to save for retirement with HSA

HSA is one of the best savings accounts for retirement, and it provides more tax advantages and flexibility than any other retirement plan. If you are using HSA to save for retirement, here are things you can do to get the most out of the plan:

Set aside enough money to cover your deductible

You will only be eligible for HSAs if you have a high-deductible health plan. Therefore, you need to have enough cash to cover the high deductibles when you need medical care. You should contribute enough money to your HSA to benefit from tax-free growth and tax-free qualified withdrawals. You should also reserve enough money in your emergency fund to cover the deductibles when they arise.

Invest the extra funds

If you have enough liquid cash to cover the out-of-pocket maximum, you should invest the extra HSA funds. Most HSA providers provide participants with a range of investment options like bonds and stocks. If your HSA provider has limited investment options, you can open an HSA with an external provider to access better investment options.

Keep a trail of medical receives

If you are using an HSA to save for retirement, you can choose to pay out-of-pocket medical expenses using cash instead of tapping into your savings account. However, you should still keep a trail of the medical receipts that you receive so that you can use them later. HSA allows participants to make tax-free withdrawals for qualified medical expenses, even if the expense was incurred years earlier, as long as they have the receipt.

Make catch-up contributions

For 2023, the contribution limit to HSAs is $3,850 for self-only coverage and $7,750 for family coverage. If you are 55 or older, you can make a catch-up contribution of $1,000 each year to your account. All the contributions you make up to the annual limit are non-taxable.

IRA rollover into an HSA

You can make a one-time rollover of IRA funds into a health savings account to get the tax benefits of an HSA. However, you can only roll over up to your annual single or family contribution maximum for the year, minus any contributions you made to the HSA during the year. An IRA-HSA rollover only makes sense if you were not planning to max out your HSA during the year.

Why use a Health Savings Account for retirement?

Once you retire, you can use your HSA funds in the following ways:

Bridge the gap to Medicare

You are only eligible for Medicare coverage when you reach age 65. If you retire before this age, you can use HSA to cover healthcare costs such as insurance premiums, until you become eligible for Medicare. While you can’t use HSA to pay for private health insurance premiums, you may be exempted if you are paying insurance premiums while receiving unemployment benefits.

Cover Medicare premiums

You can use HSA to cover Medicare costs, including Part B and D (prescription drug coverage). However, you cannot use your HSA balance to cover supplemental policy premiums. If you are over 65 and you have employer-sponsored health insurance coverage, you can use HSA to pay your share of premiums.

Long-term care expenses

You can use HSA to pay for long-term care services and nursing home fees that are required when receiving medical care away from home. You can also use your HSA funds to pay for long-term care insurance in retirement, which qualifies for tax exemption. However, there is a limit on how much you can pay tax-free for long long-care insurance based on age.

Pay for non-medical expenses

Once you reach age 65, you can use your HSA savings to pay for non-healthcare expenses. You can use the funds to cover day-to-day expenses such as home improvements and roof replacement. You won’t pay an early withdrawal penalty, but the withdrawal will be subject to state and federal income taxes.

Leave an inheritance to your spouse

If your healthcare costs are below average or you die early, you may have money remaining in your HSA at the time of death. The HSA balance will be passed along to your heirs, who could be your spouse, non-spouse beneficiaries, or your estate. If your spouse inherits the HSA balance, it will be treated as your spouse's HSA with the same tax advantages. However, if your spouse is not the designated beneficiary, the HSA will be passed to non-spouse heirs, and the fair market value of the HSA will become taxable in the year you die.