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Your Secret Retirement Investment

A Health Savings Account is a terrific tool for covering future medical costs—and avoiding taxes

blood pressure cuff around money

Travis Rathbone

If used properly, Health Savings Accounts can be a valuable retirement savings tool.

En español | Do you have health insurance through work, or a nongovernment policy you bought yourself? If so, you might have access to a great retirement account you’re not aware of.

It’s called a health savings account (HSA). It’s available to roughly 3 out of 10 working-age U.S. adults. And it’s a hidden gem, since many people who have HSAs don’t understand their full long-term potential.

Here’s how HSAs usually work: Each paycheck, you put some pretax dollars into an HSA—just as you might with its better-known cousin, the health care flexible spending account (FSA). You can pull money tax-free from either an HSA or FSA to pay for health care, as long as the cash is for approved medical expenses such as doctor visits and prescriptions.

That’s how Leon LaBrecque, 62, a financial planner from Troy, Mich., first used his HSA. But then he saw he’d be better off delaying withdrawals until after he retired, thanks to two features of HSAs not shared by FSAs: One, an HSA can hold thousands of unused dollars for years until you need them. And two, money in the account can be invested in mutual funds, giving it a chance to grow tax-free over time.

So when used for qualified medical expenses, HSAs offer a unique triple tax-free advantage for long-term investing: no taxes on contributions, earnings or withdrawals. Not even a 401(k) or IRA can match that. Which can make HSAs a great way to save.

Today, LaBrecque covers medical costs with cash on hand, not his HSA. He’s letting the account grow until he retires, after which he’ll start tapping it—ideally, he says, for “sports injuries when I’m 90.” 

Intrigued? Here’s what you need to know.

HSA basics

To contribute to an HSA, you must be enrolled in an eligible high-deductible health plan, or HDHP. This is currently defined as a health plan with an annual deductible of at least $1,350 for an individual (double that for a family plan). Among employees offered health insurance last year, 57 percent had an HDHP as an option.

  • If you have a single-person HDHP, this year you and your employer can put a combined limit of $3,450 into your HSA ($6,850 for a family plan). You can add an extra $1,000 if you’re 55 or older; a covered spouse 55 or older can save an extra $1,000 to his or her own account. While employer contributions are optional, they average out to $608 for single coverage and $1,086 for families, according to the Kaiser Family Foundation.
  • Your employer may line up an HSA provider to go with your HDHP. If it doesn’t, you can open an HSA at providers like Optum Bank and HealthSavings Administrators. Shop around; fees vary.
  • In most cases, if you have an FSA you can’t contribute to an HSA.
  • Once you enroll in any Medicare plan, you can’t make new contributions to an HSA. You can, however, use HSAs to pay Medicare premiums (but not Medigap)

Do this now

Ask yourself whether you really have enough cash to handle current medical needs. If earmarking HSA contributions for future expenses would cause financial stress now—or stop you from seeking treatment this year—this tactic isn’t for you, says Boston-based financial adviser Abe Ringer.

  • Assuming you have enough cash for this year’s health care, invest the rest in mutual funds available through an HSA. If you have health insurance through your employer, you may have a menu of funds to choose from in an HSA offered by your employer, and your employer might pay the fees. If you don’t like the investment choices in your employer’s plan or are buying insurance on your own, you can roll over your account or open a new one.
  • Choose your investments based on what you are looking for in other retirement accounts, LaBrecque says. That might include target-date funds, which are designed for people retiring around a certain year—say, 2025 or 2030.

Do this later

Off in the future, you can pull out cash tax-free to cover medical expenses incurred during retirement. You can even withdraw money years from now to reimburse yourself for medical payments you make today—again, tax-free. (Just save your receipts!)

  • Don’t need the money for health care? Once you’re 65, if you pull cash out of your HSA for nonmedical purposes, your withdrawals will be taxed as ordinary income. That’s similar to the treatment of a traditional IRA. (Use money for stuff other than health care before age 65, and you’ll get socked with a 20 percent penalty.)
  • The next time you’re choosing a health plan—perhaps during open enrollment this fall—don’t pick an HDHP just for the tax perks of an HSA. People with chronic health issues may do better with a traditional health plan such as a PPO, says Indianapolis financial planner Mychal Eagleson. To estimate possible costs, use a tool such as the Plan Comparison Cal­culator at

Stephanie AuWerter is a personal finance journalist and the winner of a Best in Business award from the Society of American Business Editors and Writers.