How Does an HSA Fit Into a Savings Strategy?


Health Savings Accounts (HSAs), which were created to help individuals covered by high deductible health insurance plans (HDHPs) save money to pay for medical expenses that must be paid out-of-pocket before the insurance coverage begins, are playing an increasingly important role in retirement savings strategies.

HSAs vs. IRAs

HSAs are IRA-like accounts and offer the same tax benefits as traditional and Roth IRAs combined.

  1. Contributions to HSAs are tax-deductible
  2. Investment earnings in the HSA are tax-deferred.
  3. If an HSA distribution is used to pay for qualified medical expenses, it is tax-free—which means no tax is ever paid on the contributions or investment earnings.


This triple tax benefit is unlike any other tax-advantaged savings vehicle available today. With these tax benefits, HSAs have become an important tool not only for paying medical expenses, but also for supplementing retirement income. HSAs are increasingly being used as part of a retirement saving strategy for several reasons:

  • HSA account balances can be built up to pay future medical or other expenses in retirement because they do not have to be forfeited at year-end, like a health flexible spending arrangement.
  • Employers may contribute to employees’ HSAs, but HSAs are not tied to an employer. They are individual, portable accounts.
  • Contributing to an HSA does not affect how much you may contribute to your IRA or employer-sponsored retirement plan.
  • HSAs may be invested in any type of investment permitted in a self-directed IRA.
  • HSA distributions are tax-free if used to pay for qualified medical expenses incurred by you (the HSA owner), your spouse, or your dependents, regardless of whether you are still covered by an HDHP or are otherwise eligible to contribute to an HSA.
    • After you reach age 65, HSA distributions that are not used to pay for qualified medical expenses, while taxable, are no longer subject to the additional 20% tax.

HSA example

Here’s an example of how someone could incorporate HSAs into their long-term savings strategy.

Elizabeth, age 55, works for a consulting company that offers a 401(k) plan and an HDHP paired with an HSA. Elizabeth is married and has family coverage through her employer’s HDHP. She participates in her employer’s 401(k) plan and has a self-directed traditional IRA and HSA with Mainstar.

Elizabeth has chosen to maximize her retirement and medical savings accounts for 2018 as follows:

401(k) plan salary deferrals $18,000
401(k) plan catch-up contribution $6,000
HSA contribution (family coverage) $6,750
HSA catch-up contribution $1,000
Traditional IRA $5,500
Traditional IRA catch-up contribution $1,000
Total tax-deductible savings $38,250


Individuals who cannot afford to save the maximum amount in all of their retirement and medical savings accounts may choose to balance the contributions to their 401(k) plan and HSA, such as funding the HSA to the extent needed to cover deductible contributions, then funding their 401(k) plan to the level needed to receive the full employer matching contribution, before putting any more into their retirement savings.

To learn more about Health Savings Accounts