While most people have heard of 401(k) plans and IRAs, there are other, lesser-known long-term savings vehicles. One example is that of Health Savings Accounts (HSAs). HSAs are tax-advantaged savings accounts for those with high-deductible health plans (HDHPs). The idea is that since those with HDHPs generally have lower premiums but higher out-of-pocket expenses, they need a way to save for such expenses.

Not all eligible taxpayers take full advantage of HSAs. The Employee Benefit Research Institute estimated a few years ago that out of the approximately 17 million people eligible, only about 13.8 million opened HSA accounts, leaving almost 20 percent without one. The survey also revealed that very few people maximize their contributions – and nearly everyone takes current distributions, leaving balances far lower than they could be otherwise.

Why Does This Matter?

The HSA’s tax advantages make it a great way to save for retirement and in some ways it is even better than using a retirement account. For example, HSA owners can make tax-deductible contributions either via payroll deductions or on their own; the account grows tax-free on interest, dividends and capital gains; and withdrawals for qualified medical expenses are tax-free. In contrast to a 401(k) or IRA, HSAs do not require withdrawals at a certain age, allowing the account to remain untouched and growing tax-free for the rest of one’s life. Now let’s look at some considerations for fully taking advantage of an HSA.

Maximize Contributions Before It’s Too Late

HSA contributions are only tax-deductible before a certain age; once someone qualifies for Medicare, this tax advantage ends. Those eligible for Medicare can technically no longer have an HDHP and therefore are not allowed to make deductible contributions to an HSA. Upon reaching 55, catch-up contributions of an additional $1,000 per year are allowed for both the taxpayer and their spouse, if married.

Look at HSAs as an Investment Tool

While HSAs weren’t intended to be investment accounts, treating it like one is the best way to benefit from the tax advantages. HAS owners should get in the mindset of treating contributions as “untouchable,” and pay their medical expenses with money from outside the account.

Aside from maximizing contributions and taking out as little as possible, it’s important to invest HSA funds wisely. HAS owners should consider an investment strategy similar to what they use for other retirement assets, within the context of their entire portfolio.

Lastly, remember that while an employer might make it easy to open an HSA account with a certain administrator or even set employees up with a default provider, the HAS owner ultimately has say over where to keep their money. An HSA is more like an IRA than a 401(k)s in this respect, so look around for a plan that offers high-quality, low-cost investment options.

Maximize HSA Assets in Retirement

By waiting until retirement to use HSA funds, taxpayers enable those assets to grow tax free with the potential to use the funds tax free as well. They will be able to use the funds tax free only for qualified medical expenses, but, luckily, the definition of medical expenses is expansive. For example, in addition to the typical items, tax-free HSA withdrawals can be used to pay for  portions of the premiums for certain long-term care insurance policies, in-home nursing care, retirement community fees that include certain types of care, and nursing home fees.

Another item worth noting is that since there are no required minimum distributions, HSA owners never need to worry about being forced to withdraw the money.


HSAs are largely overlooked as investment tools even though their unique tax advantages make them an excellent choice. Obviously, HSA owners should not hoard funds at the expense of their health care, but if they have the means to fund their HSA and pay medical expenses before retirement with other money, they can reap the benefits in years to come. Lastly, keep in mind that these strategies are all based on current federal tax law. While most states follow federal tax law regarding HSAs, not all do.