The HSA Triple Threat

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How to utilize an HSA for triple tax benefits in healthcare and retirement savings

Two of the most fundamental goals of financial planning are saving for retirement and managing healthcare costs. There are many tools and strategies that can be used for accomplishing these goals. Investing in a Roth IRA, utilizing an employer’s 401(k), and shopping for affordable health insurance plans are just a few of the many popular rules of thumb we often hear when it comes to making savvy savings decisions. One perhaps overlooked tool that has built-in tax benefits for both retirement savings and healthcare savings is the Health Savings Account (HSA).

What Is an HSA?

An HSA is a tax-advantaged savings account that can be used for current or future qualified healthcare costs. HSAs have the rare perk of being a triple tax-advantaged investment vehicle. Funds that are contributed to an HSA are deducted from taxable income, can be invested and grow within the account tax-free, and the withdrawals are tax-free if they are used for qualified expenses.

For 2022, the IRS allows individuals to contribute $3,650 and families to contribute $7,300. If you are above the age of 55 then you are allowed an additional $1,000 “catch-up” contribution.

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Who can use an HSA?

In order to contribute to an HSA, you must be insured through a high-deductible health plan (HDHP). An HDHP is a health insurance plan with lower premiums in exchange for a higher deductible. In 2022 a healthcare plan must have a minimum deductible of $1,400 ($2,800 for families) and an out-of-pocket maximum of at least $7,050 ($14,100 for families) to be considered an HDHP.

In addition to being limited to those enrolled in HDHPs, Individuals are not eligible to contribute to an HSA if they are covered by another non-HDHP healthcare plan (such as a spouse’s), enrolled in Medicare or TRICARE, claimed as a dependent on someone’s tax return, covered by the VA, or have an alternative medical savings account such as an FSA (see below).

While many employers offer HSA plans as a benefit, you do not need to be employed to open and contribute to an HSA. Like IRAs, HSAs are “individual” plans as opposed to “group” plans such as 401(k)s or pension plans, and fully belong to the individual no matter what their employment status is.

What is the difference between an HSA and FSA? 

There also exists an apparently similar account known as a Flexible Savings Account (FSA). It is important to point out the distinction between an FSA and an HSA.

FSAs are only for those who are employed and the company that they work for must offer participation in the plan as a benefit. As mentioned above this is not the case for HSAs as anyone meeting the eligibility requirements can open and contribute to one.

Another key difference between the two is that an HSA allows you to carry leftover funds year after year, thus allowing the advantage of tax-deferred growth. Depending on the plan, FSA balances are typically forfeited at the end of the year if they are not used. However, employers typically will allow a small portion of the account to be carried over.

As their name suggests, Flexible Spending Accounts do allow for a wider range of qualified expenses that the funds can be withdrawn for.  

What expenses can HSA funds be used for?

Qualified medical expenses that can be withdrawn tax-free from HSAs include generally anything that would be deductible as an itemized medical and dental expense on your tax return. Over-the-counter medicine (prescribed or not) paid for after 2019 is also considered a qualified expense.

Insurance premiums are not considered qualified medical expenses unless they are for long-term care, COBRA, or Medicare (you aren’t eligible to contribute to an HSA if you are on Medicare, but you can use existing funds for premiums).

The penalty for withdrawing HSA funds for non-eligible expenses is 20% in addition to being required to include the withdrawals as taxable income in the year in which they are taken.

How can an HSA be used for retirement savings? 

As discussed earlier, HSAs can produce a triple tax benefit if used correctly. Contributions can be invested and grown over time, and then withdrawn without ever incurring taxes on the initial contribution, which you deducted from your income. The power of compound growth exponentially increases the impact of these benefits over time. Imagine contributing the maximum each year (which is higher than an IRA ma) and not having to touch them until you reach retirement age. You would have a large nest egg of tax-free money to use on your healthcare costs that will likely be much higher as you grow older.

Not only can you save up for future healthcare costs in retirement, but once you reach age 65 the 20% penalty for non-qualified expenses goes away. You still will need to pay taxes on withdrawals not used for medical expenses, but that just means that your HSA essentially works just like an IRA or 401(k) that has the added benefit of tax-free withdrawals for medical expenses!

Why should you NOT use an HSA? 

The benefits stated above are subject to the current healthcare needs of a family or individual. High deductible health plans are only advantageous when you are healthy and do not have to go to the doctor or incur high medical costs often. The money saved on premiums is wiped out by the opportunity cost of what insurance would have covered from a lower deductible plan.

There are countless factors that go into what savings strategy might be appropriate for a family or individual so make sure you seek the advice of a financial planner before making a long-term decision on how to save for retirement or healthcare.


Check out our blog page for more information on HSAs and retirement savings. You can also check out Schwab’s HSA FAQ page for useful information.