Health Savings Accounts: What They Are and How They Impact Your Retirement


There’s no denying the impact healthcare can have on your finances. Luckily there’s a savings account to help with such expenses: a Health Savings Account (HSA).


If you’re concerned about your net worth being compromised by medical expenses, an HSA is one way to create a financial buffer so you can preserve as much of your wealth as possible. It even helps when saving for retirement.

What is a Health Savings Account?

An HSA is a type of tax-advantaged savings account designed specifically for healthcare-related expenses. You can make contributions to your HSA tax-free and withdraw tax-free as well if it’s for qualified medical expenses (more on those later). Your HSA balance grows just like any other retirement savings vehicle, and your balance can be carried over year to year and job to job.


You must be enrolled in a high deductible health plan (HDHP) to qualify for an HSA. According to the IRS, an HDHP in 2017 is defined as a health plan with an annual deductible no less than $1,300 for individual coverage and $2,600 for family coverage. As for annual out-of-pocket expenses, the plans must not exceed $6,550 for individuals and $13,100 for families. HDHP members pay in full up until the defined limits and after reaching your deductible, all qualified costs are covered by the HDHP. You can access an HDHP through your employer or purchase it as an individual.

Tax implications of HSAs

An HSA offers two primary tax benefits to savers:

  1. The money you contribute each year is tax-deductible, which can help to lower your tax bill.
  2. Withdrawals for qualified medical expenses — including any earnings on what you’ve saved — are tax-free.


If you pull money out of an HSA before age 65 for anything other than medical expenses, you’ll pay a 20% tax penalty, plus regular income tax on the distribution. But once you turn 65, you can make non-medical withdrawals from an HSA penalty-free. You will still pay income tax on those distributions, but if you stay healthy, your HSA could be used to supplement your employer-sponsored retirement plan, an Individual Retirement Account (IRA), or Social Security.

How can I use an HSA?

HSAs are meant to be used for qualified medical expenses. Those include:

  • Routine physical exams
  • Dental treatment
  • Eye exams, glasses, and eye surgery
  • Hearing aids
  • Hospital services
  • Lab fees
  • Nursing services
  • Prescription drugs
  • Operations (excluding cosmetic surgery)
  • Therapy


Generally, you can’t use an HSA to pay premiums for health insurance.

Who can contribute to an HSA?

Besides being enrolled in a HDHP, the IRS requires that you meet the following criteria to contribute to an HSA:

  • Generally, you can’t be covered by another health plan, including a spouse’s insurance.
  • You can’t be covered by a Flexible Spending Account (FSA) or be claimed as a dependent on someone else’s tax return.
  • You can’t be enrolled in Medicare or have received benefits from the Veteran’s Administration within the past three months. Even though you can’t contribute to your HSA when enrolled in Medicare, you can still make withdrawals. Again, withdrawals for qualified medical expenses are tax free.

HSA contribution limits

Like other tax-advantaged savings plans, the IRS caps how much you can save in an HSA each year. This amount is based on whether you have individual or family coverage.


In 2017, the limit for individual coverage tops out at 3,400 and $6,750 for family plans. At age 55, you can begin making additional catch-up contributions of $1,000. If you have access to an HSA through your employer, they have the option of making matching contributions to your account.

How HSAs help your retirement

Your HSA balance grows tax free just as other typical retirement savings vehicles like a 401(k) or IRA. However, as Investopedia explains, HSAs stand apart from these other accounts because there is no minimum age to start withdrawing.


According to HealthView Services’ 2016 Retirement Health Care Costs Data Report, the average 65-year-old couple retiring today can expect to spend $288,400 on healthcare premiums (including Medicare Parts B and D, as well as supplemental insurance) in retirement. When you add out-of-pocket expenses for things like deductibles, copays, vision, and dental care, the cost increases to $377,412. That’s why HSAs can be so helpful in retirement: Since withdrawals for qualified medical expenses are tax free, you can tap into your savings for these expenses without penalty.


In addition, the IRS allows you to use HSA funds to cover long-term care insurance premiums. You can also use what you’ve saved to pay for long-term care services. That’s significant if you think there’s a possibility of you or your spouse needing long-term care at some point in retirement. According to Genworth Financial, the national median monthly cost of a private room in a nursing home is $7,698 for 2016. That’s more than $92,000 a year.


The U.S. Department of Health and Human Services estimates that 69% of Americans will need some type of long-term care, with 35% spending at least one year in a nursing home. Approximately 20% of today’s 65 year olds will need long-term care for five years or more. Considering that Medicare doesn’t pay for long-term care, an HSA could end up being a very valuable asset to have if you want to avoid tapping into your retirement savings for those expenses.

Other HSA uses

Perhaps your health in retirement is good enough that you don’t believe you’ll need all of your HSA funds for health expenses; your HSA can act as another source of retirement funding, even though the withdrawals will be taxed. This account could also be used if an unexpected, non-health expense arises. However, it’s worth considering if you will need those HSA funds later for health expenses since withdrawals for qualified expenses are tax-free.

More information

To learn more about how to save for retirement, Ask a Citizen at your nearest Citizens Bank Branch.


Disclaimer: Views expressed may not necessarily reflect those of Citizens Bank. The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.