How an HSA Can Boost Your Retirement Savings

When it comes to picking a health insurance plan, the options can seem confusing. For years, I avoided my company’s high-deductible health insurance plan with a health savings account (HSA) because it felt scarier than simply paying the monthly premiums and predictable co-pays of a PPO plan.

I have a hunch that many people are in the same boat—they don’t bother with an HSA because of the extra legwork required and it’s easier to stick with the familiar. But after taking a closer look, I realized how much an HSA had to offer and ditched the PPO for an HSA-eligible high-deductible plan.

For many people, HSAs offer a compelling mix of tax breaks and other savings that can keep their health insurance costs down. But under the right circumstances, these accounts offer an even more powerful—and largely under appreciated—chance to boost your long-term savings and provide a nest egg to offset the rising cost of health care later in life. 

Deciding when to use an HSA

First, let’s talk about how an HSA actually works.

HSAs are special accounts used to pay for medical expenses and other qualifying health-related costs. Your HSA contributions are tax-deductible, and they grow tax-free when you invest them, just like the money in your 401(k) and IRA. As long as you use the funds for qualifying medical and health-related costs, you won’t pay taxes on the HSA money you use. 

HSAs are available when you select a qualified high-deductible plan, which offers lower monthly premiums and sometimes an employer-matching contribution. A good way to determine if an HSA makes sense for you is to compare your expected medical costs against the plan’s details. 

Add up the potential savings in premiums over a PPO plan, your potential tax break for HSA contributions, the value of the employer match, and your total deductible. If your expenses look to be higher than the value of all those benefits, you’re probably safer in the PPO. This may be the case if you have a chronic condition or anticipate a major medical expense like having a baby next year. But if your medical costs are likely to be lower, then you have a chance for real savings with an HSA. 

That’s the basic benefit of HSAs, but high-income earners have the chance to get even more mileage out of the plan by using it to boost retirement savings. 

Using your HSA to its greatest potential

If you’re maxing out contributions to tax-deferred retirement plans like a 401(k) and an IRA, then an HSA is the next logical step. I recommend using it before non-deferred options like a Roth IRA. 

The reason: If you can contribute the maximum allowable each year to your HSA (currently $3,850 for an individual or $7,750 for family coverage in 2023), and then can manage to pay your medical expenses out of regular cash flow, you can leave those HSA contributions invested for years to enjoy compound growth. Also, keep in mind that those 55 and older can contribute an additional $1,000 as a catch-up contribution.

Of course, paying for your medical expenses without tapping your HSA savings requires not just sufficient cash flow, but also a healthy emergency fund so you have reserves on hand for large, unexpected medical expenses. You also might want to pay closer attention to the treatment you receive and what you’re billed for. Many people prefer the convenience of saying yes to whatever tests the doctor wants to run and letting insurance handle the bills. But when you’re paying out of pocket, you have to take ownership of your care and make cost-effective decisions.   

In return for that extra effort, though, you’re getting a powerful tool for retirement. By investing your HSA savings as you would your retirement savings—typically in a diversified mix of mutual funds and ETFs that offer the opportunity for long-term growth—you’ll build a tax-free fund dedicated to health costs in retirement, which are likely to represent a significant portion of your future budget. 

This approach to managing your health insurance won’t work for everyone, but it’s worth considering for those in the right financial circumstances. And even if you end up dipping into your HSA savings to cover some medical bills, you’ll still receive tax breaks on your contributions and the benefit of lower monthly premiums.

Remember: The familiar path isn’t always the best path.

Stepping out of your comfort zone, as I did, makes sense when the opportunities are so compelling. And in this case, the chance to add another pool of tax-deferred money to your retirement savings is an advantage you shouldn’t ignore.

Helpful Resources

Continue Your Learning: Are you seeking additional information on how HSAs potentially fit into your financial wellness plans?  We invite you to explore the topic further in our comprehensive article, "HSAs and FSAs: Understanding How they Fit Into Your Plans." Dive deeper into the world of tax-advantaged accounts and how they can shape your financial future. Read More

Maximizing Your Benefits at Work (and Beyond) Webinar: Don't miss out on the opportunity to supercharge your financial knowledge. Join us for our upcoming webinar, "Maximizing Your Benefits at Work (and Beyond)," scheduled for Friday, October 6 at 10 am PT/1 pm ET. Our experts will share invaluable insights on optimizing your workplace benefits, including HSAs and more. Even if you can't attend live, registering ensures you'll receive access to the recording once it becomes available. Register Now