Tax Policy

2018 Guide For Using an HSA as a Retirement Account

Is an HSA right for you?

Health saving accounts are great for paying annual medical bills while reducing your tax burden. Contributions to an HSA reduce taxable income and can be used for qualified medical expenses tax-free! With the new tax changes taking effect in 2018, it’s going to be more difficult to deduct medical expenses without the use of an HSA. This is why it’s more important than ever to start investing in an HSA account.

However, with the rising cost of medical expenses in the later stages of life it might be more beneficial to treat an HSA as a retirement vehicle instead of a cash account. This article will breakdown how an HSA account can be used as a hybrid retirement account with tax-free contributions, tax free growth, and tax free distributions.

Rising Healthcare Cost

According to the Federal Reserve Bank of Saint Louis, in the past 20 years headline CPI has grown at an average annual rate of 2.2%, whereas the price level of medical care has grown at an average annual rate of 3.6%—about 70% faster.

Even more so, a study by the Centers for Medicare and Medicaid Services projects that the average growth in health spending will accelerate between 2016 and 2025, at 5.6% per year, driven by inflation in the cost of medical services and products, and an aging population.

It’s estimated that the average individual over the age of 65 will require $18,424 in medical care per year and will have to pay $3,684.80 in out-of-pocket expenses after Medicare, Medicaid, and private insurance reimbursements. Assuming the cost of healthcare continues to increase at that same rate, a 30-year-old today will have to pay an estimated $25,000 per year in out of pocket expenses when they reach the age of 65.

HSA Contribution Limits

The downside of using an HSA as a retirement vehicle is the low contribution limits. For 2018 the contribution limits for an HSA is $3,450 for a single individual and $6,900 for a family plan. There is an additional $1,000 contribution allowed for individuals 55 years and older however this is still lower than other retirement options. Compare this with traditional and Roth IRA contribution limits of $5,500 for individuals under 50 and $6,500 for individuals 50 and older.

Adding an HSA is great for high earners who already max out their other retirement options. This allows for additional tax-free growth to defer income until retirement. The added benefit of an HSA is that these distributions can be completely tax free if they are used for qualified medical expenses.

Using an HSA to Save for Retirement

Traditionally, individuals will use their retirement savings to supplement their medical costs. The benefit of using an HSA as a hybrid retirement vehicle is the option to use tax-free distributions to pay for medical expenses. Instead of paying tax on traditional IRA distributions, individuals can use HSA distributions to save considerable tax.

However, to really benefit from the tax-free growth, taxpayers should refrain from using the funds in these accounts until they retire. Even more so, since healthcare costs are expected to increase 5.6% per year individuals need to be more aggressive with their HSA accounts to match the pace of inflation. This means treating HSA accounts like traditional retirement vehicles by investing in stocks and higher risk investments.

Consult a Financial Advisor

Investing in an HSA is not for everyone but it can be a lucrative retirement option for high income individuals. Consult with a trusted tax and financial advisor to see if using an HSA as a retirement account is right for you.


This article is for education purposes only and should not be relied upon as investment, tax, legal or other paid professional advice or services.

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