Tax-free saving

Most types of accounts require you to pay taxes at some point. With traditional retirement accounts—IRAs and 401(k)s—you can defer the taxes until you withdraw the money.

Newer types of accounts like Roth IRAs and 529 college savings plans aren’t federally tax-deductible, but their growth is tax-free as long as you use them as intended.

HSAs are a little different, because money you put into them may never be taxed. Contributions are tax-deductible, and as long as you have qualifying health expenses to claim, withdrawals are tax-free too. Finally, because HSAs can offer access to long-term investments, you can put the money in stock or bond funds, and any growth will also be tax-free.

Tax treatment of retirement accounts

HSAs offer “triple tax advantages”

Take a look at how these benefits stack up:

  1. Contributions are pre-tax.
  2. Earnings are deferred until withdrawal, tax-free if you meet the requirements.*
  3. Withdrawals are tax-free if you meet the requirements.*

And that’s not all. Contributions are also deductible in most states, and free from Social Security payroll taxes in most cases.

The maximum contribution for 2018 is $3,450 if your HDHP covers a single person, or $6,900 if it covers a family. You can contribute an extra $1,000 if you’re age 55 or older.

The best retirement account you’re not using

While the explicit purpose of an HSA is to save for health care expenses—it’s in the name, after all—it’s actually an extremely flexible account. And its combination of tax benefits can even make HSAs a more attractive vehicle for retirement (or any other kind of) savings than something like an IRA or 529.

If you need the money in the HSA for health expenses, it’s there—and you get a nice tax break on your contributions.

If you don’ t need it—either because you have no qualifying expenses or because you can afford to pay the expenses without touching the HSA—you still get the tax break, and that money can keep growing tax-free indefinitely.

Prioritizing your retirement contributions to maximize after-tax growth

Suggested priority order for funding accounts

To make the most of your accounts, first invest in your employer plan up to the match. Then max out an HSA if you have one. Next, load up other accounts with tax advantages until you hit the limit. Finally, if you still have more to save, use taxable accounts for the rest.

When should you make your withdrawals?

The flexibility of HSAs even extends to the timing of withdrawals for eligible expenses. Say you spend $3,000 on braces for your daughter when she’s a preteen. With an HSA, you don’t have to submit the claim right away—you can pay out of pocket and put the claim in 10 years later, when she’s in college. (And remember that at a 6% growth rate, that $3,000 could now be worth over $5,300!)

This option means that, assuming you can afford it, you’ll have to make a decision over and over again—do I reimburse myself for my expenses now? Or keep that money growing for a long-term goal?

Remember that paying the $3,000 out of pocket (rather than reimbursing yourself) may have an impact on your ability to fund other retirement savings accounts, like an IRA. In that case, you’ll have to decide whether to:

  • Keep the money in the HSA, or to
  • Withdraw it at the time you incur the expense and stick it in an IRA.

The answer depends on considerations like which account offers a wider variety of low-cost investments.

(Note that what you shouldn’t do is fund the HSA instead of accounts like an IRA or 529, and then take the $3,000 out a decade later and go on vacation. No matter how much you want to celebrate your empty nest.)

In a nutshell:

  • If you need the reimbursement to cover everyday expenses, take it out.
  • If you can still fully contribute toward your retirement goals without the reimbursement, leave it in.
  • If leaving money in the HSA means you won’t be able to make your retirement contributions for the year, you’ll have to decide which makes more sense for you: leaving it in the HSA, or taking it out and sticking it in an IRA.

Missed opportunities?

Of open HSA plans, only 48% of owners contributed to it. And only 4% hold assets other than cash.

Most HSA owners are still missing out on the long-term benefits. Less than half contribute at all, and only a tiny fraction hold stock or bond investments.

What’s the catch?

Is there any downside to using an HSA to save for retirement? Sure. For one thing, it can require a lot more recordkeeping. You’ll be responsible for documenting any health care expenses you might later use to make a claim and withdraw money. (Tip: Consider backing up your receipts or other documents electronically. You won’t need them to request reimbursements, but the IRS can come calling at any time!)

And, of course, you won’t have access to an HSA unless you’re enrolled in an HDHP, which might not be right for you.

One “catch” you might be wondering about: What if you don’t end up having qualifying expenses?

We think this one is unlikely. Average health care costs in retirement run into the hundreds of thousands of dollars, and even if you’re healthy, you can use HSA money to pay Medicare or long-term care insurance premiums. (Your spouse can also inherit the account tax-free if you die with money remaining. If you’re not married, you can leave it to another beneficiary who will have to pay income tax when withdrawing the money.)

So is it right for you?

In the end, your decision about how to use your HSA depends on more than just tax considerations, of course.

You’ll want to make sure your HSA provider has a broad selection of low-cost investments if you’re going to invest for the long term.

Learn more about HSAs that offer Vanguard funds

And of course you’ll want to take your own situation into account: Will you get tired of managing multiple account types? Will you keep up with the paperwork? Will you resist raiding assets that are meant to be for your retirement but are oh-so-accessible?

We can do this!

As with other retirement planning decisions, finding the best way to use your HSA can be complicated—but we’re here to help. If you want to know more about using an HSA to save for retirement, take a look at our research paper.

HSAs: An off-label prescription for retirement saving


*Withdrawals must be offset by qualified health expenses. Withdrawals from HSAs that are not used for qualifying expenses are subject to income tax, as well as a 10% penalty tax if you’re under age 65.


All investing is subject to risk, including the possible loss of the money you invest.

We recommend that you consult a tax or financial advisor about your individual situation.