HSA as a Retirement Strategy: Maximizing Tax-Free Medical Savings

Health care is likely to be one of the most significant costs you’ll need to plan for in retirement. Premiums, prescriptions, and out-of-pocket bills add up quickly, and they don’t always move in step with the rest of your budget. Having a strategy for these expenses lets you better decide when and in what way to draw from your other savings.

Thankfully, this is an area where a health savings account (HSA) can help. These accounts get powerful tax benefits today while setting aside money for future medical expenses. Treated thoughtfully, an HSA can work alongside other retirement accounts to help you keep more of what you have worked hard to save.

What Makes HSAs Unique for Retirement Planning

HSAs offer three distinct tax benefits: contributions can lower your taxable income, the money inside grows tax-deferred, and withdrawals for qualified medical expenses come out tax-free. Over time, that setup can add considerable strength to your overall retirement savings.

Unlike flexible spending accounts (FSAs), HSAs allow balances to roll forward each year. This makes it possible to build long-term savings, and since the account is yours, it stays with you through job changes and into retirement.

To qualify, you must be covered by a high-deductible health plan (HDHP). You generally cannot have additional coverage that pays for non-preventive medical costs before you meet your deductible, such as a standard health plan, a general-purpose FSA, or certain types of supplemental insurance. You also must not be enrolled in Medicare or listed as a dependent on another person’s tax return.

Contribution Limits and Catch-Up Opportunities

The ceiling on what you can put into an HSA changes each year, and there are a few planning levers worth using. Contribution choices also vary depending on whether you fund through payroll or on your own. Keep these points in mind:

Annual Contribution Limits: For 2025, you can contribute up to $4,300 with self-only HDHP coverage or $8,550 with family coverage.¹ Contributions from you, your employer, or anyone else all count toward these totals.

Catch-Up Contributions at Age 55+: Starting the year you turn 55, you can add an extra $1,000 on top of the standard limit. If both spouses are 55+, each can make their own catch-up into their own HSA.²

Impact of Maximizing Contributions: Regularly hitting the limit can build a sizable, tax-favored pool for future medical costs. Even modest, steady contributions benefit from compounding over long horizons.

Using HSAs for Medical Costs in Retirement

HSA dollars can cover a wide range of qualified expenses: deductibles and copays, prescriptions, many dental and vision costs, medical equipment, and more. That flexibility helps you target the bills that hit hardest in retirement.

You can no longer contribute to an HSA once you enroll in Medicare. However, previously built-up HSA savings can be used for a variety of Medicare expenses. This includes premiums for Part A, Part B, Medicare Advantage (Part C), and Part D prescription coverage, along with other qualified out-of-pocket costs. Premiums for supplemental Medigap policies, on the other hand, cannot be covered by HSA dollars.³

A popular tactic is to save receipts for qualified expenses you pay out of pocket today. As long as the expense occurred after you opened the HSA and you kept documentation, you can reimburse yourself years later, letting the money grow in the meantime.

Common Retirement Accounts vs. HSAs

HSAs play a different role than IRAs and 401(k)s, since they’re designed around health costs but carry retirement-like benefits. Understanding the differences makes it easier to see how each account fits into your broader financial plan:

Traditional IRAs and 401(k)s: Contributions may reduce current taxable income, but withdrawals are taxable in retirement. HSAs can deliver tax-free withdrawals for qualified medical expenses, which helps you handle health costs without adding to taxable income.

Roth IRAs: Roth contributions are after-tax, and qualified withdrawals are tax-free. HSAs offer tax-free withdrawals for qualified medical expenses at any age and pre-tax contributions up front, which can complement Roth money for non-medical needs.

HSA Penalty-Free Withdrawals (After Age 65): HSA withdrawals for qualified medical expenses are penalty-free at any age. However, non-medical withdrawals before 65 are taxable and carry an additional 20% federal penalty; after 65, they’re taxable like IRA withdrawals, but the penalty drops away. For non-medical spending after 65, an HSA functions much like a traditional IRA (taxable, but without the early-withdrawal penalty) while medical withdrawals remain tax-free.

Please Note: While HSAs have powerful tax advantages, they are not a substitute for traditional retirement accounts and should not necessarily take priority over saving in vehicles like a 401(k) with an employer match or a Roth IRA. Instead, HSAs are best viewed as a complementary tool.

Long-Term Planning Benefits of HSAs

HSAs can play a bigger role in retirement planning than just paying current medical bills. Here are several ways they support long-range goals:

Offsetting Rising Healthcare Costs: Medical inflation may outpace overall inflation, which means health care will likely take a growing share of your retirement budget. Having HSA assets dedicated to these expenses provides a built-in cushion that can help protect the rest of your savings from being drained too quickly.

Tax-Efficient Retirement Withdrawals: Using HSA funds for qualified medical expenses allows you to reduce the amount you need to withdraw from taxable accounts in any given year. This flexibility can help you manage your taxable income more effectively and avoid being pushed into a higher tax bracket.

Coordination With Medicare: Once you enroll in Medicare, contributions to an HSA must stop, but the balance you’ve built can still be used. These funds can cover qualified premiums, deductibles, and copays, easing the impact of medical costs on your monthly retirement budget.

Estate Planning Opportunities: HSAs also carry unique inheritance rules. A surviving spouse can continue the account as their own, but non-spouse beneficiaries generally must treat the entire balance as taxable income in the year they receive it. Thoughtful beneficiary planning ensures the account is handled in line with your family’s needs.

HSAs and Retirement FAQs

1. Can I keep contributing once I’m on Medicare?

No. Once you enroll in Medicare, your HSA contribution limit drops to zero, even if you still have a high-deductible health plan. However, you can continue using the HSA for qualified costs in retirement.

2. What happens to my HSA when I die (spouse vs. non-spouse)?

If your spouse is listed as the beneficiary, the HSA simply transfers to them and continues as their own account. They can use the funds for qualified medical expenses tax-free, and the account remains subject to the same contribution and distribution rules that applied during your lifetime.

If someone other than your spouse inherits the account, it no longer keeps its HSA status. Instead, the balance on the date of your death is typically counted as taxable income for that beneficiary in that tax year. That amount can be reduced, though, if the inherited funds are used within one year to cover any qualified medical expenses you incurred before passing.⁴

3. Can I use HSA funds for dental and vision costs in retirement?

Yes. Many dental and vision expenses qualify for tax-free withdrawals from an HSA, both before and during retirement. This includes common items such as routine exams, cleanings, fillings, dentures, eyeglasses, and contact lenses.5 As with any qualified expense, you’ll need to keep receipts and confirm eligibility.

4. How are non-medical withdrawals taxed before and after age 65?

If you take money out for non-qualifying reasons before age 65, it will be taxed as income and hit with an extra 20% federal penalty. After 65, they’re taxable but no longer penalized; qualifying medical withdrawals stay tax-free regardless of your age.

5. Do HSA contributions count toward IRA or 401(k) limits?

No. HSA contribution limits are completely separate from retirement plan limits.

How We Can Help You Maximize Your HSA Strategy

An HSA isn’t only useful for covering current health expenses; it can also play an important role alongside your broader retirement plan. With tax advantages, flexibility in covering health care costs, and the potential for long-term investment growth, HSAs can help protect your other savings while giving you greater control over your future spending.

Our team specializes in integrating HSAs into broader financial strategies, including offering solutions to help manage your HSA investments effectively. We can help you determine how much to contribute, whether to keep funds in cash or invest for growth, and how to coordinate withdrawals in retirement to minimize your tax burden. Our planning also considers how HSAs fit with Medicare, Social Security timing, and other retirement accounts.

If you’d like personalized guidance on how to make the most of your HSA, whether that means setting contribution targets, developing an investment approach, or planning for legacy considerations, we invite you to connect with us. Schedule a complimentary consultation today, and we’ll build a tailored HSA strategy that aligns with your financial goals.