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A Health Savings Account Now Can Save You Money in Retirement

HSAs can help cover out-of-pocket Medicare costs and provide a triple tax break

illustration of a computer keyboard button labeled Health Savings Account

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En español | Most people know that health savings accounts (HSAs) are a source of tax-free money to pay out-of-pocket medical expenses. But if you plan carefully, HSAs can also be a valuable source of retirement savings, providing a triple tax benefit that is even better than a 401(k).

Medical care is a big part of retirement spending. Fidelity Investments estimates that a 65-year-old couple will need about $300,000 to cover health care expenses in retirement — including Medicare premiums, copayments, deductibles and prescription drug costs.

If you start planning, the HSA can be a great source of tax-free money for those expenses and more. Don't pass up the triple tax benefits of an HSA.

Save more in an HSA for out-of-pocket health costs 

You can't make new contributions to a health savings account after you enroll in Medicare. But you can contribute to the account before then as long as you have an HSA-eligible health insurance policy — whether through your employer or on your own. In 2022, the policy must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. You can contribute up to $3,650 in 2022 if you have self-only health insurance coverage or $7,300 for family coverage, plus an extra $1,000 if you're 55 or older. Plus, many employers contribute to employees’ accounts — an average of $870 for Fidelity's employer plans.

You have until the tax-filing deadline — generally April 15 — to contribute to an HSA for the previous calendar year. If you only had an eligible high-deductible health insurance policy for the first few months of the year, your contribution limit will be prorated based on the number of months you had the eligible policy.

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Tax-free withdrawals for Medicare expenses

You're not taxed on HSA money you use to pay out-of-pocket medical expenses at any age, such as your health insurance deductibles, copayments and costs for prescription drugs, as well as over-the-counter medications purchased after Jan. 1, 2020. You can also take tax-free withdrawals for dental and vision care, hearing aids and other eligible expenses that aren't covered by insurance. And you can withdraw money tax-free to pay eligible long-term care insurance premiums, with the amount based on your age — $1,690 in 2022 for ages 51 to 60, $4,510 for ages 61 to 70, or $5,640 if you're older than 70.

The biggest benefit for retirees: After you turn 65, you can also withdraw money tax-free from the HSA to pay Medicare Part B, Medicare Part D and Medicare Advantage premiums for you and your spouse. You can't use HSA premiums for Medicare Supplement Insurance (also called Medigap), the extra health insurance you buy from a private company to pay health care costs not covered by Medicare, such as copayments, deductibles and health care if you travel outside the U.S.

These costs can add up: The Fidelity study found that the average 65-year-old couple pays $116,570 in premiums for Part B and Part D during their lifetimes. If you're paying Medicare premiums automatically from your Social Security benefits, you can withdraw money tax-free from your HSA to reimburse yourself for these costs. Be sure to keep records of the premiums you paid.

After you turn 65, you can also withdraw money from the HSA for nonmedical expenses without incurring a 20 percent penalty, but you'll have to pay taxes on those withdrawals. If you plan carefully and keep good records, however, you should have plenty of opportunities to withdraw the money for HSA-eligible expenses and avoid the tax bill, says William Stuart, director of strategy and compliance for Benefit Strategies LLC, a third-party administrator that helps employers provide HSAs.

“In the worst-case scenario, the tax treatment is no different from a 401(k). And it can be better if you can withdraw the money tax-free,” he says.

A strategy to build up more tax-free money

A quirk of the HSA rules gives you an unlimited amount of time to withdraw money tax-free for any eligible expenses you incurred since you opened the account. If you use other cash for those expenses at the time, you can leave the money growing in the HSA for the future — and then withdraw it tax free anytime.

“It's always best to leave your funds to grow tax-free and reimburse yourself later — and it's even better if you are investing your funds in the meantime,” says Roy Ramthun, president of HSA Consulting Services.

If you plan to keep money growing in the account, make sure your investments match your time frame. Most HSAs let you invest in a portfolio of mutual funds for long-term growth, in addition to offering a savings account for short-term expenses.

Keep records of all HSA-eligible expenses you paid out of pocket through the years. You can look up eligible expenses at

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 coverage on COBRA after you lose your job. COBRA is a federal law that lets people continue their employer's coverage for up to 18 months after they lose their job, if they worked for a company with 20 or more employees.

Steven Hamilton, an enrolled agent in Grayslake, Illinois, who is authorized to represent taxpayers in front of the IRS, recommends holding on to receipts of the eligible expenses and the explanation of benefits from your insurance company, as well as records showing that you didn't deduct the expenses on your income tax return or withdraw the money for those costs from your HSA. (IRS Form 8889 reports HSA distributions each year.) Some HSA administrators, such as Fidelity and the HSA Authority, provide tools that make it easy to keep track of your eligible expenses and whether or not you paid for them with money from the HSA.

Being able to withdraw money tax-free from your HSA can help tax-diversify your retirement income (like a Roth IRA), especially if most of your savings is in tax-deferred accounts such as traditional IRAs and 401(k)s. The money you withdraw from an HSA for qualified medical expenses isn't included in the income calculations that determine whether you're subject to the Medicare high-income surcharge or if you have to pay taxes on your Social Security benefits.

This article, originally published June 16, 2020, has been updated with 2022 information.

Kimberly Lankford is a contributing writer who covers personal finance and Medicare. She previously wrote for Kiplinger’s Personal Finance magazine, and her articles have also appeared in U.S. News & World Report, The Washington Post and the Boston Globe. She received the personal finance Best in Business award from the Society of American Business Editors and Writers.