How to Maximize a Health Savings Account

As high-deductible health plans (HDHP) become more popular with the increased cost of health insurance, more and more people are contributing to a Health Savings Account (HSA). There are many benefits of an HSA. Not only are your contributions to your HSA account tax deductible, when you take the funds out for qualified medical expenses your distributions are tax free. While these are great benefits in the short term, many people are not taking advantage of the most appealing benefit: long-term savings.

What Makes an HSA a Great Long-Term Savings Vehicle

With a HDHP many people use their HSA funds to cover their medical costs that come up during the year. For example, if your deductible is $2,500 you might opt for payroll deductions equaling $2,500 so that you have cash saved to cover medical expenses your plan doesn’t cover. From a planning perspective, this is an excellent way to build up savings for medical expenses. It allows you to deduct the $2,500 from your taxes which you may not be able to do otherwise. (You can only deduct medical expenses from your taxes when they are more than 7.5% of your adjusted gross income). (For more, see: Retire Early and Cover Healthcare Costs With Obamacare.)

It’s not the short-term benefits of HSA accounts that have financial advisors excited. The long-term benefits for many people will far outweigh the short-term savings. Think of it this way, when it comes to financial planning why do we constantly preach about saving and investing for the long-term in your retirement account? The benefits of compound interest over time will allow you to take smaller amounts of money each year and build them into a large retirement nest egg. We can take that same principle and apply it to your HSA account. The main difference between an HSA and the more common Flexible Spending Account (FSA) is the use it or lose it benefits. Funds that remain in an HSA can be rolled over for as long as you are alive. So if we take that $2,500 a year and don’t spend it on medical expenses, we can begin to build a health care fund for retirement. 

Funding an HSA for a Retirement Benefit

Investing your HSA funds can be similar to those of your other retirement accounts. There are a few key differences that make an HSA a fantastic long-term savings vehicle. The first is that you don’t have to wait until your 59½ to start taking out funds. If you have a significant medical expense along the way, you are able to take funds out of your account tax free. If you have funds in your HSA that you don’t use for health expenses, you can begin taking distributions at age 65 without penalty.

According to HealthView services, the average healthy American couple retiring today at age 65 will spend $6,999 per year in Medicare costs alone. That’s an overall retirement cost of $266,589. The total health care costs project to be almost $400,000. In 10 years that number is expected to grow to $645,466. It shouldn’t be hard to find many uses for your HSA funds in retirement. Let’s look at an example of how saving money in an HSA now can help you best prepare for those expenses in retirement. A 40-year-old couple putting away the maximum amount until they retire at age 65 would have a $455,665 balance at a rate of return of 7%.

Using an HSA to Fund Long-Term Care

Long-term care has become a major concern for today’s retiree. Will you need it and if you do how you will pay for it? According to, someone turning age 65 today has almost a 70% chance of needing some long-term care services and supports in their remaining years. The cost of long-term care can range from $3,000 to $7,000 per month depending on the type of care you need and where you reside. (For more, see: Healthcare Documents You Need In Place Right Now.)

There are two ways that you HSA can help you plan for long-term care expenses. The first is by utilizing your funds to purchase a long-term care policy. The premiums you pay for a qualified long-term care insurance contract can be funded by money from your HSA on a limited basis.

Let’s look at an example of how to use funds from your HSA to build up self-funded long-term care savings. A couple age 50 decides to start contributing that maximum monthly amount to their HSA account until they retire at age 65. At age 65 the couple chooses not to purchase long-term care insurance with their HSA balance. Instead of using those funds, they continue to invest and earn a 6% rate of return over that time. By the time they reach age 80 they would have over $400,000 in HSA savings they could use for qualified long-term care expenses.

The reality is no matter how you choose to use your HSA funds for retirement, very few other investment options will give you the ability make pre-tax contributions, tax-free distributions and take advantage of long-term compounding interest. Health insurance is a major concern for retirees. Creating a plan that makes sense and getting an early start could give you the flexibility you need to create a successful retirement plan. (For more, see: What to Do to Prepare for Retirement.)

1Projections are based on monthly contributions being invested at a 7% rate of return

2Based on a 7% return on investment

3Based on a 6% return on investment and contributions stopping at age 65