Health savings accounts are a proven tool in reining in health care costs. But many Americans are also discovering their tremendous value as retirement savings vehicles, as well.

Here’s why: When used properly, contributions to HSAs have the potential to combine tax-deductible contributions, tax deferral, and tax-free reimbursements for medical expenses in retirement (after reaching 65).

In addition, taxpayers can access these funds tax-free for qualified medical expenses at any time.

HSA benefits:

  • No penalty for withdrawals prior to age 59½ if they are made to pay qualified medical expenses.
  • Withdrawals to pay medical expenses are tax-free.
  • All unused funds roll over each year and continue to accumulate.
  • Portability – HSA funds go with you as you change employers.
  • Can be used to pay long-term care insurance and Medicare premiums.
  • Can be used for vision, dental and hearing treatments (even if your health insurance plan does not cover these services).

Note: Taxpayers should be aware that withdrawals from HSAs for purposes other than qualified health expenses are subject to income tax, plus a penalty of 20%. That penalty is twice the penalty normally applied to early distributions from IRAs and 401(k)s.

Furthermore, while the 10% fee on early withdrawals from IRAs and 401(k)s goes away at age 59½, the 20% penalty on withdrawals from HSAs for non-qualified purposes remains in effect until age 65.


You can only contribute to an HSA in a given year if you are covered by a high-deductible health plan (HDHP). Typically, these plans will have lower premiums than other comparable health insurance plans, but higher deductibles than are normally found in employer plans. As of 2018, the minimum deductible for a self-only HDHP is $1,350, and $2,700 for family plans.

HSA contribution limits (2018)

As of 2018, single taxpayers can contribute a maximum of $3,450 per year into an HSA, while those with family plans can contribute up to $6,850. Those aged 55 or older can contribute an extra $1,000 each. The maximum out-of-pocket costs for 2018 are $6,650 for self-only plans, and $13,300 for family plans.

You can reimburse yourself for documented medical expenses even decades after you incur them. If you can pay non-reimbursable, non-covered expenses out of pocket, rather than tapping your HSA, you can keep funds in your HSA and let them continue to accumulate tax-deferred. Once you reach the age of 65, all those funds become available to you with no penalty.

To execute this strategy, take the following steps:

  1. Maximize your annual contributions to an HSA.
  2. Pay all non-covered medical expenses out of pocket, rather than tapping your HSA. Let the HSA continue to accumulate, tax-deferred.
  3. Save your receipts.


  • Jim makes the maximum allowable contribution of $6,650 for 25 years (disregarding future contribution limit increases) – and leaves it there. All medical expenses are paid out of pocket.
  • Assuming $8,000 per year in medical expenses, on average, the total medical expenditure would be $200,000.
  • Meanwhile, Jim is able to achieve 7% annual returns on his contributions.

At the end of 25 years, he will have amassed $420,606.10 within his HSA – if he can just wait until age 65. If he saved his receipts, he can reimburse himself up to $200,000, tax-free, even before turning age 65. However, the longer he can allow his savings within the HSA to compound, the greater his income in retirement is likely to be.

Furthermore, with HSAs, there are no required minimum distributions. If you choose, you can allow your HSA to accumulate tax-deferred, indefinitely.