You may already be familiar with a health savings account as a tax-advantaged way to save money for medical costs.

But what many people don’t realize is that an HSA can also be a great way to save for retirement, along with the traditional tools for retirement planning such as IRAs and 401(k) plans. Its special treatment by the IRS means it can help your money grow for retirement, and not only for health care costs. Here’s what you should know about HSAs.


Similar in many ways to a flexible spending account (FSA), an HSA helps you save money on qualified medical expenses by allowing you to contribute pre-tax dollars to a special account. This helps lower your federal taxable income for the year (how much it helps lower your state taxes varies by location).

You must participate in a high-deductible health plan (HDHP) and meet IRS-specified criteria to be eligible to open an HSA, however. But you can use your HSA funds to cover medical deductibles, prescription medication, trips to the ER, some dental work, corrective lenses, mental health services and much more at any point in time. It’s also portable, which means you can take it with you even if you change jobs — although you can’t keep contributing to it unless you’re enrolled in an HDHP.

In 2020, you can contribute up to $3,550 for one person or $7,100 for a family. That will go up to $3,600 and $7,200, respectively, in 2021. If you’re 55 or older, you can add an extra $1,000 to your contribution — all of that money can be used to cover medical expenses, tax-free.

So what makes an HSA different from an FSA or a standard bank account? Two key features: the ability to roll your funds from one year to the next and the power to invest your contributions.

By default, your HSA contributions funnel into a specialized savings account that typically earns a modest amount of interest. But you can choose instead to invest some (or all) of your HSA balance in individual stocks and funds offered by your account’s administrator.

The process is similar to investing in a 401(k) or IRA: You make tax-free contributions, which can sit in a cash account or be moved to investments of your choice. And it’s up to you to decide how you want to allocate your funds.


But here’s where the HSA really shines in the company of IRAs and 401(k)s: you get three tax breaks on your funds:

  • Your contributions are tax-deductible, just like those you make to a traditional IRA or 401(k).

  • Your HSA balance enjoys tax-free growth, just as with a Roth IRA or Roth 401(k). So your savings may earn interest or your investments may see growth that won’t cost you at tax time.

  • Your qualified withdrawals are shielded from federal taxes, just like those you’d pull from a Roth IRA or Roth 401(k).

Withdrawals from an HSA are tax-free for qualified medical expenses if you're under 65. If you use your savings to cover anything outside of that, you’ll pay income taxes on your withdrawals and a 20 percent penalty for spending your funds on non-qualified expenses.

But the rules change once you’re 65. Withdrawals for covered medical costs remain tax-free. You're also free to use your HSA money for non-qualifying expenses as well. Those withdrawals are taxed as ordinary income, but you won’t face a hefty IRS penalty.

Be aware that some states treat HSAs differently. For instance, the federal government guarantees your triple tax break, but California and New Jersey currently tax your contributions, capital gains, interest and dividends. And Tennessee and New Hampshire require tax payments on your dividends and interest.


An HSA can take your retirement savings plan to the next level. The account essentially allows you to contribute several thousand dollars more toward your retirement every year tax-free, on top of what you might already be saving in a 401(k) and/or IRA.

When you approach your funding and withdrawal strategy, it’s crucial to balance short-term savings for this year’s health costs with long-term savings for retirement. Consider splitting your HSA to tackle both goals: keep enough cash in your HSA’s savings account to cover today’s medical bills and to cover your health plan’s annual out-of-pocket maximum; and invest the portion you'd like to dedicate toward saving for retirement.

If you do invest, make sure you follow the basics of smart investing: Keep an eye on fees, diversify your investments and match your portfolio allocation to your risk profile.

This publication is not intended as legal or tax advice. Please consult with a qualified tax professional for tax advice.

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