Here Is Your Secret Tax Weapon for Saving for Retirement

A health savings account can be a source of tax-free cash to cover medical expenses in your later years

Cameron Huddleston,

AARP

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Published September 10, 2025

a woman walking up a stethoscope in the shape of a staircase

Kyle Ellingson

One often-overlooked way to set aside funds for health care expenses in retirement is to build money in a health savings account (HSA).

As the name suggests, an HSA allows you to earmark money for health care costs. But it can serve another purpose: If you leave money in the account to grow rather than use it for current medical expenses, it can function as an extra retirement account, bolstering your nest egg.

“I’m a huge fan of using HSAs as a long-term strategy, not an immediate piggy bank,” says Steven Jarvis, CEO of Retirement Tax Services in Spokane, Washington.

An HSA offers a tax benefit you don’t get with a 401(k) or an individual retirement account (IRA). While withdrawals from traditional retirement accounts are taxed at your regular income tax rate, there are no taxes on money you take out of an HSA to pay for qualified health care costs.

That can translate to significant savings, considering a 65-year-old who retires in 2025 can expect to spend an average of $172,500 on medical expenses throughout retirement, according to Fidelity’s latest Retiree Health Care Cost Estimate study. Here’s what you need to know to make an HSA part of your retirement planning strategy.

How HSAs work

You can save money in an HSA if you have a high-deductible health insurance policy. In 2025, your plan’s deductible must be at least $1,650 for individual coverage or $3,300 for family coverage to qualify. Deductible requirements increase in 2026 to $1,700 for individual coverage and $3,400 for family coverage.

Using an HSA to save for out-of-pocket medical expenses offers three tax benefits:

You can make pretax contributions to an HSA through payroll deductions if you have a high-deductible health insurance plan through work. If you’re self-employed, you can open an HSA on your own and claim a tax deduction for your contributions.
Earnings on the investments in your HSA grow tax-free.
Your withdrawals aren’t taxed if the money is used to pay for qualified medical expenses, such as health insurance deductibles, prescription drugs, dental work, hearing aids and vision care.

The money you withdraw for qualified medical expenses is not included in the income calculations that determine whether you’re subject to the Medicare premium surcharge for higher-income beneficiaries or whether you have to pay taxes on your Social Security benefits.

How to maximize your HSA contributions

Generally, you’ll want to max out your HSA contributions while you’re still working and covered by your employer’s health insurance plan. Once you enroll in Medicare, you can no longer contribute to an HSA.

In 2025, you can contribute up to $4,300 if you have individual insurance coverage or $8,550 for family coverage. Contribution limits increase in 2026 to $4,400 for individual coverage and $8,750 for family coverage. You can contribute an extra $1,000 if you’re 55 or older.

Many companies contribute to their employees’ HSAs — an average of $1,015 annually, according to the Employee Benefit Research Institute. You have until the tax-filing deadline to contribute to an HSA for the previous calendar year. That means you can make tax-deductible HSA contributions for 2025 until April 15, 2026.

If you had an eligible high-deductible health insurance policy for only the first few months of the year, your contribution limit will be prorated based on the number of months you held the eligible policy.

Letting HSA funds grow tax-free

A unique feature of an HSA is that you have an unlimited amount of time to withdraw money tax-free for any eligible expenses you’ve incurred since opening the account. That’s why many financial advisers recommend using other sources of cash to pay for current medical expenses and leaving HSA money untouched as long as possible.

“It’s always best to leave your funds to grow tax-free and reimburse yourself later,” says Roy Ramthun, president of HSA Consulting Services in Silver Spring, Maryland, and a former White House adviser on health policy. “It’s even better if you are investing your funds in the meantime. Just like with a retirement plan, you will likely end up with a larger balance over time.”

Most HSAs let you invest in a portfolio of mutual funds for long-term growth and offer a savings account for short-term expenses. To reimburse yourself with HSA funds in the future, keep receipts for any eligible medical expenses you pay out of pocket, Jarvis says. You can look up eligible expenses in IRS Publication 502 “Medical and Dental Expenses.” Be aware that over-the-counter drugs and menstrual products are not on that list but are considered eligible expenses.

You can also make tax-free HSA withdrawals to pay your health insurance premiums if you lose your job and are receiving unemployment benefits or if you continue your employer’s health insurance coverage through COBRA.

How to use tax-free withdrawals for Medicare expenses

A big benefit of HSAs for retirees is the ability to withdraw money tax-free to pay premiums for Medicare Part B, Medicare Part D and Medicare Advantage plans for you and your spouse (if you have one). These costs can add up: According to the 2025 Fidelity report, a 65-year-old could pay nearly $76,000 in Part B and Part D premiums during their lifetime. If you’re automatically paying Medicare premiums from your Social Security benefits, you can withdraw money tax-free from your HSA to reimburse yourself for these costs.

HSA funds cannot be used to pay premiums for Medicare Supplement Insurance, also called Medigap.

How to cover other costs with an HSA

You can also withdraw HSA money tax-free to pay for eligible long-term care insurance premiums; the maximum amount is based on your age. In 2025, the limits are:

$480 for age 40 or younger
$900 for ages 41 to 50
$1,800 for ages 51 to 60
$4,810 for ages 61 to 70
$6,020 if you’re older than 70

After you turn 65, you can withdraw money from an HSA for nonmedical expenses. You’ll have to pay income taxes on the withdrawals, but not the additional 20 percent penalty that nonmedical distributions are hit with when made before age 65.

Kimberly Lankford contributed to this report.

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Cameron Huddleston is an award-winning personal finance journalist and author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. Her work has appeared in Kiplinger.com, Kiplinger's Personal Finance, Forbes Advisor, Chicago Tribune, Business Insider and many more online and print publications.