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Should a Health Savings Account be in your Retirement Toolkit?

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Healthcare costs during retirement are much higher than most people expect. A recent Retiree Health Care Cost Estimate survey suggests that a 65-year old individual retiring in 2021 will spend approximately $150,000 on health care and medical expenses throughout retirement. Double that amount for couples. 

A health savings account (HSA) could make paying these costs more manageable. While HSAs provide individuals of all ages with a tax-advantaged way to save for future medical expenses, they may be particularly beneficial when used as part of a larger retirement plan. 

Weigh the pros and cons of an HSA to decide if you should add this account to your retirement toolkit.

Health Savings Account - Advantages

HSAs have tax benefits. If you obtain an HSA through an employer, you can contribute pre-tax dollars via payroll deductions. Some employers may even match contributions. If you're self-employed or your employer does not offer an HSA, you can still make contributions by setting up your own account. You'll receive the tax benefits when you file your federal income tax return. Either way, you don't pay taxes on HSA deposits.

HSAs offer flexibility. You can spend your HSA funds on your timeline. This means you can withdraw funds to pay for medical services today or years from now. Unlike other retirement-related accounts, there's no early withdrawal penalty. 

As long as funds are used to pay for qualified medical expenses, they remain tax-free. And, there's no rush to "use it or lose it" when you experience a life change such as a career move or a relocation to another state.

Some HSAs have features similar to other investment products. For example, you could earn interest on your account balance or select an HSA account that invests in mutual funds. As a tax-advantaged account, any interest you earn on the account balance is tax-free.

Similar to other retirement savings accounts, an HSA allows qualified individuals to make "catch up" contributions. For calendar year 2021, the annual contribution limit is $3,600 for individuals, and $7,200 for families. But, if you're 55 years or older, you can "catch up" by adding another $1,000 to the annual limit. 

There are no income limitations. Some retirement vehicles and investment products have income caps that disqualify you from opening an account. This is not the case with HSAs. You can open an HSA and make contributions regardless of your individual or household income. 

Health Savings Account - Disadvantages

Not everyone qualifies for an HSA. Unless you have a high-deductible health plan (HDHP) and no other health coverage, you cannot enroll in an HSA. Medicare enrollees and individuals claimed as a dependent on someone else's federal income tax return are also excluded from program participation. 

HDHPs are not recommended for individuals with chronic illnesses or those who anticipate high medical bills. Since plan participants must pay a minimum amount (deductible) before the insurance company starts to cover medical bills, out-of-pocket costs could strain your finances.


Regularly investing in an HSA today could provide the funds you need to help cover medical expenses during retirement. Account benefits may vary depending on your specific situation. Consult with a trusted tax advisor to confirm how an account could affect your financial plans during retirement.