Health Savings Account (HSA): An Important Retirement Account to Consider

A Health Savings Account is a terrific way to save for medical costs in retirement. It allows you to avoid paying federal taxes on money you spend for a wide variety of health care expenses.

What Is An HSA?

An HSA is a savings account for money you can use tax-free to pay for some health expenses.

How Can I Use HSA Money?

Examples of the types of healthcare expenses you can spend your HSA money on include¹:

• Acupuncture
• Ambulance service
• Blood sugar test kits for those with diabetes
• Bandages
• Birth control treatment
• Breast pumps and lactation supplies
• Contact lenses and solutions
• Drug prescriptions
• Eyeglasses (Rx and reading)
• Feminine hygiene products
• Fertility enhancement
• Flu shots
• Infertility treatments
• Hearing aids and batteries
• Insulin
• Laboratory fees
• Mental health services
• Over-the-counter medicines
• Personal protective equipment (PPE) such as masks and hand sanitizer
• Stop-smoking programs and products (such as nicotine gum or patches if prescribed)
• Surgery (excluding cosmetic)
• X-Rays
• Vaccines
• Vasectomy
• Walker, cane
• Wheelchair

HSA v. FSA:

You might already be familiar with Flexible Spending Accounts (FSAs) — which you can also use to pay for healthcare with pre-tax dollars, but there are a few big differences between FSAs and HSAs. Here is the breakdown:

HSAs allow your money to grow year after year without the threat of losing it if you do not use it. There are several benefits to this type of account.

• The money in the account can be invested and grow — all tax-free.
• You can withdraw from the account at any time to pay for qualified medical expenses without paying taxes on the withdrawn money.
• You do not lose the funds if you do not use them within a year.

One downside is that if you withdraw the funds before the age of 65 for any reason other than to cover qualifying healthcare expenses, the IRS will charge you regular income tax on the money, plus a penalty of 20%. After age 65, you can withdraw the money for non-healthcare related expenses without paying a penalty, however, it will be taxed as ordinary income.²

Who Is Eligible for an HSA?

Some employers provide HSAs for employees, but you can always open an HSA yourself with a bank, brokerage firm, or other financial institution. But you must be enrolled in a high-deductible health plan (HDHP) and you may not be enrolled in Medicare.

The definition of a “high-deductible" changes periodically. Check HealthCare.gov to see how much your deductible must be to be considered an HDHP.

How Much Can I Contribute to an HSA?

There are annual contribution limits for HSAs which can change periodically. Check the IRS's website or talk to your employer (if the HSA is through them) to learn how many pre-tax dollars you can put in your HSA.

If your health savings account is operated through work, employers can contribute to an HSA on your behalf. However, your combined contributions cannot exceed the annual contribution limit.

What Are the Benefits of an HSA?

Most tax-advantaged retirement savings accounts allow you to save on taxes when you make contributions, or when you make withdrawals, but not both. An HSA has savings at both ends. You do not need to pay taxes on the funds when you put them in the account, nor when you spend the money on qualified health expenses. Also, your money can grow in these accounts. Some HSA banks offer ways to invest your funds.

Tax Implications for People Aged 65 or Older:

Funds can also be taken out for any non-healthcare purpose without penalty after age 65. If you are fortunate enough to not need your HSA money for healthcare, it can be an additional source of retirement income. Withdrawals will be taxed as ordinary income, but there will not be a 20% penalty.²

What if You Need the Money in Your HSA Before You Retire?

Because HSAs allow tax-free withdrawals to cover healthcare costs, these funds can be used to cover qualified costs that come up during your working years. But if you can afford to, you may prefer to let this money grow until you retire rather than using it to fund immediate healthcare needs.

Managing Healthcare Costs with CareCredit

If you are looking for an option to help manage your medical bills, consider healthcare financing with the CareCredit credit card. The CareCredit card can help you pay for the care you want and need and make payments easy to manage.* Apply today and use our Acceptance Locator to find a provider near you that accepts CareCredit. Continue your wellness journey by downloading the CareCredit Mobile App to manage your account, find a provider on the go, and easily access the Well U hub for more great articles, podcasts, and videos.

Our Expert Reviewer

Patty Caballero and her team of consultants together have more than 35 years of health insurance knowledge working for some of the biggest health insurance companies in the US. She has knowledge in building brands and strategic initiatives to help consumers better understand their health benefits.