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How HSAs Can Help Your Clients Save for Retirement

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What You Need to Know

  • HSAs offer a unique triple tax advantage.
  • They can be used to cover eligible health care costs in retirement on a tax-free basis.
  • HSAs can be used to cover long-term care insurance premiums for eligible policies.

Health savings accounts (HSAs) are an excellent medical savings account. Money can be set aside on a pretax basis to cover eligible medical expenses with tax-free withdrawals. 

Unlike its counterpart the flexible spending account (FSA), money in an HSA can be carried over to subsequent years if it is not needed to cover current year expenses. This is what makes it an excellent retirement savings vehicle for your eligible clients. 

A recent survey by Fidelity Investments pegs the cost of health care in retirement for a couple both aged 65 at $300,000, and these costs are growing. This estimate does not include the costs of any long-term care needs your client might have. HSAs can help clients offset some of these costs in retirement. 

How HSAs Work 

A high-deductible health plan is required to utilize an HSA. These options are offered by many employers and this might be something to consider during this open enrollment period for clients not already using one. 

High-deductible plans can also be obtained separately for those who are self-employed or who do not have access via their employer. 

Contribution limits for an HSA are:

Many HSA providers offer investment accounts in which the money can be invested in options similar to what clients might find in a 401(k) or IRA.

Triple Tax Advantage 

HSAs offer a triple tax advantage. Contributions are made on a pretax basis; money can be withdrawn on a tax-free basis to cover qualified medical and related expenses; and the money inside the HSA grows tax-free until needed. This last feature, along with the ability to carry unused money over from year to year, makes the HSA ideal for retirement savings. 

HSAs as a Retirement Savings Vehicle 

For clients who can utilize an HSA and who don’t need to use the money to cover current medical costs, HSAs offer a number of advantages. 

The first is the current-year tax break of pretax contributions. This is open to any HSA holder regardless of whether or not they use the money immediately or let it accumulate over time. This can serve as another tax break for your clients while they are working. HSAs can also offer another retirement savings option for clients who are already maxing out their 401(k) and IRAs. 

For clients who don’t need to use the money to cover current medical expenses, this money can grow as a “savings account” to cover eligible medical costs in retirement on a tax-free basis, making the HSA a very solid vehicle to accumulate extra money for retirement. 

Eligible Retirement Medical Costs 

There are a host of medical and related costs that can be paid using funds from your HSA on a tax-free basis. 

HSA dollars can be used to cover the cost of your client’s long-term care insurance premiums. There are two caveats to be aware of. First, be sure their policy is a tax-qualified policy. Most LTC policies today are qualified, but you should verify this, nonetheless. Second, there are limits as to the amount that can be withdrawn from the HSA each year to cover these costs based on your client’s age. 

Medicare premiums and deductibles, including Medicare Parts A, B, D and Medicare HMO premiums, can be covered by HSA funds on a tax-free basis, whether the client pays them directly from their Social Security benefits or they write a check for the premiums. HSA funds cannot be used to pay Medigap premiums. 

Medicare does not cover all types of health care expenses. Some examples of expenses not typically covered by Medicare Parts A and B that can be paid via HSA funds include: 

  • Most dental care
  • Eye exams that are related to prescribing glasses
  • Dentures
  • Cosmetic surgery
  • Acupuncture
  • Hearing aids and related exams
  • Routine foot care 

Having a reserve of funds that can be used to specifically cover medical related costs tax-free can provide a nice boost to your client’s retirement nest egg. 

Bridging the Gap 

Sometimes your clients enter retirement or semi-retirement prior to being eligible for Medicare. This might occur because they leave their employer early, either voluntarily or involuntarily. In this type of situation, one solution to their health insurance needs might be to take COBRA coverage from their former employer for up to 36 months. 

COBRA coverage is essentially the same health insurance they had with their former employer, only it is considerably more expensive. HSA funds generally cannot be used to pay health insurance premiums. But HSA money can be used on a tax-free basis to cover the cost of COBRA coverage. 

Even if your client doesn’t go the COBRA route, HSA money can still be used to cover eligible medical expenses not covered by their health insurance prior to being eligible for Medicare. 

The HSA at Age 65 and Beyond

No additional HSA contributions are allowed once your client begins taking Medicare. However, if they are covered by an eligible employer health insurance plan and not enrolled in Medicare, they can continue to make HSA contributions until they enroll in Medicare. 

Once they hit age 65, money can be withdrawn from the HSA in much the same way as from a traditional IRA if your client needs the money. The withdrawals will be taxed as ordinary income just like with an IRA. The money can stay in the HSA to be used to cover eligible medical expenses as well. There are no RMDs on an HSA. 

HSA Beneficiaries and Estate Planning

Clients can and should designate one or more beneficiaries for their account. If the beneficiary is a spouse, they will own the account upon the account holder’s death and have the ability to use the HSA funds to make tax-free withdrawals to cover eligible medical expenses. If the surviving spouse is covered by a high-deductible health insurance plan, they can make pretax contributions to the HSA. 

Ownership does not pass to non-spousal beneficiaries. The money will be distributed to them and taxes will be due on this money. 


HSAs offer another retirement savings option for your clients who are eligible. Their triple tax advantage is unique. They offer benefits while your client is working and into retirement. HSAs can help clients set aside tax-free money that can be earmarked for health care costs in retirement, a retirement expense that continues to grow. 

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