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Health savings accounts for retirement planning: Pros and cons

Stace Caseria

Posted on October 26, 2022

Stace Caseria is a professional writer who specializes in finance and technology.
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Define what a health savings account is and how it fits into tackling the growing longevity challenge.

Break down the triple tax benefit that an HSA can provide.

Note that along with the benefits are rules that restrict how flexible an HSA can be.

Health savings accounts (HSAs) are an option to help pay for today’s medical expenses and are typically coupled with a high deductible health insurance plan. But a health savings account can be even more valuable when you consider its place in your retirement-savings tool kit.

People are living longer than ever, with the Social Security Administration saying that men and women turning 65 today can expect to live into their mid-80s .1 Improved medical care is one reason we’ll enjoy more golden years than our grandparents or even our parents. But as people age into their 70s, 80s and beyond, medical care becomes an ongoing necessity — barring any medical miracles in the near future.

Social Security may pay for some of those costs, but likely can’t cover all expenses for many people. Indeed, there are some questions about what kind of income stream from the Social Security program people will be able to depend on in the future. Those medical costs then will likely fall more and more upon an individual’s personal savings. (Learn more: Social Security basics)

Health savings account – better with age

If you currently have a health savings account, you may know that you get a triple tax benefit; money goes in tax free, it grows tax free and, when you use it for qualifying medical expenses, it’s disbursed tax free. But it does take some planning to get the most value.

Take this scenario: You contribute a set amount from each paycheck to your HSA, and since you have a high-deductible health insurance plan, you pay medical expenses out of pocket until you reach your deductible threshold. If you’re withdrawing from your health savings account for those out-of-pocket medical expenses throughout the year, you’re only taking advantage of two tax savings opportunities (reduction of taxable income and tax-free withdrawal).

But your money has not grown much, if any, because it has not had time to. The question then is what would happen if you were to pay all medical expenses out of pocket today, without touching your health savings account for years, or even decades?

Save those co-pay receipts

Lee McGowan, a Certified Financial Planner® professional, is a managing director at Monument Group Wealth Advisors in Concord, Massachusetts. He advises that for clients to take full advantage of a health savings account in retirement, they should “pay all of their medical expenses out of pocket today and let their HSA grow tax free.”

He said this way you’re getting the benefit of the triple tax advantage. But what if you build a sizable account, then have fewer medical expenses in retirement than you estimated? Lee said that shouldn’t be a concern because “HSA withdrawals after 65 will be treated like IRA or 401(k) withdrawals if not taken for medical reimbursements – no penalties, just income tax. That adds flexibility.”

Better than a 401(k) or IRA?

This raises the question of which should you fund first, retirement accounts, such as 401(k)s and IRAs, or your HSA? Lee offers this advice: “It depends on your individual situation. You should at least make HSA contributions up to your expected healthcare costs for a given year. … As for long-term savings, if your employer is also contributing to a 401(k) or other retirement plan on your behalf, you’ll want to meet the matching contribution at least, and then consider the health savings account for additional long-term savings.” (Related: What is a 401(k)?)

It’s necessary, he said, to gather information on all your employer-matching contributions, understand your capacity to save and do some math to see which path is the most advantageous. In addition, you should consider or consult a financial professional about the opportunities and possible effects of any other retirement savings programs or investments available to you.

Of course, your analysis should begin from a financial point of view, but must also take into account your individual health or medical needs. If you have chronic health issues today that you can’t pay out of pocket while also contributing to your health savings account, you may be tapping into the health savings account regularly to the point that it won’t have a chance to grow.

Other health savings account benefits:

  • It’s your money. If you change jobs, the account goes with you. “What’s great is that even if your new employer doesn’t offer an HSA, you can use your existing account to pay for qualified out-of-pocket medical expenses, like co-pays and co-insurance, but not premiums,” said Alan Hurley, associate director of human resources for benefits at Holy Cross College.
  • It’s not a flex spending account. There’s no use-it-or-lose-it risk with a health savings account, so you’re able to create a long-term plan.
  • Managing your health care. Participating in a health savings account is an incentive to understand more about your medical care and can potentially eliminate unnecessary procedures.
  • Investment flexibility. “You may be able to invest your HSA funds depending on your plan, and I recommend having a few safe investments to keep some funds liquid – if you incur unexpected health care expenses,” said Hurley.

The drawbacks of a health savings account

McGowan said that as with any investment account, “you have to perform due diligence and pay attention to administration and transaction fees. So check with your provider’s plan and shop around if possible.” Also, per IRS Publication 969, there is a 20-percent penalty for non-medical expense withdrawals for individuals younger than the age of 65.2

Then there’s the reality of how much you can contribute to your health savings account annually. For 2022, the IRS mandated contribution limit is $3,650 for an individual, and $7,300 for a family. That’s just a fraction of the amount you can contribute to a 401(k), for example. For 2023, the contribution limits are $3,850 and $7,750, respectively.

Indeed, the amounts involved in HSAs are unlikely to amount to more than a minimal supplemental stream of income in retirement. That reinforces the need for careful retirement planning ahead of time and the consideration of all investments. (Related: How to get started on retirement planning)

A hedge against an uncertain future?

A health savings account can be a valuable resource to augment your savings in retirement, when you will likely have more medical expenses than today. If your employer is currently offering a contribution to employee accounts, seriously consider making the move to a high-deductible health plan to take advantage of the triple tax benefit through an HSA. And to get the most benefit from the tax-free growth, consider paying today’s medical expenses out of pocket if you’re able, “banking” the receipts for the future when your account will have had the benefit of time to grow.

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This article was originally published September 2016. It has been updated.


1U.S. Social Security Administration, “Calculators: Life Expectancy.”

2Internal Revenue Service,“Publication 969.”

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.