The Incredible, Investable HSA: How to use Your HSA the Right Way for Retirement Success

Trailhead Planners LLC |

Health Savings Accounts

Health Savings Accounts (HSA) are incredible.  In fact, they may be the best retirement savings tool available! Unfortunately, most individuals and families who have the option of using an HSA are using them wrong, missing an incredible opportunity to reduce their current tax bill, grow tax-free savings, and withdraw money tax-free when used for qualified health expenses.   You read that, right.  HSAs offer not one, not two, but three ways to potentially save on taxes.  Are you starting to see why we love them so much?

First, let’s get the basics out of the way:

What is an HSA?

Health Savings Accounts are a special type of savings account setup for the intended purpose of paying medical expenses. 

Who Can Setup an HSA?

Anyone who is on a high deductible health insurance plan can set up an HSA account.  High deductible health insurance plans are usually defined as having a deductible of at least $1,300 for individuals and $2,600 for families.

How do I contribute to an HSA?

If you have an employer-sponsored HSA plan, you may be able to have your employer automatically deduct HSA contributions directly from your payroll on a pre-tax basis. Your employer may even contribute toward your HSA on your behalf (which is a great perk if offered).  If you are using a self-directed HSA, you can make contributions directly from your checking account to the HSA.  Make sure you let your tax preparer know that you contributed to an HSA so you get the tax deduction!

How much can I Contribute to an HSA?

For the 2018 tax year contribution limits are as follows:

  • Individuals: $3,450
  • Families: $6,900

How Should I use My HSA?

Now that we have the basics out of the way, let’s focus on the best ways to use your HSA.  In our experience, most individuals and families are using their HSA the wrong way, or forgetting to contribute at all. 

How do most people use their HSA?

Before getting into you you should use your HSA, let's first touch on how most people use their HSA.  (Hint: Poorly.  They use it poorly.) 

According to data compiled by Morningstar, most HSA participants use their HSA like a medical spending account.  In other words, they use their HSA like an Flexible Savings Account, or FSA, wrongly believing, potentially, that HSAs are ‘use it or lose it’.  This leads them to spend every cent that they can contribute in the same year as if an HSA were a glorified ATM for health expenses. 

However, whatever amount of money that doesn’t get spent in your HSA this year simply carries to the next year and so on and so on.  In fact, we think the optimal way to use an HSA is to contribute annually, let the investments grow over a period of decades, and then use the proceeds to cover health expenses during the period most people will spend the most out of pocket on health care: retirement.

Here’s why:

Triple Tax Efficiency

Here’s the most important aspect of HSAs – the part that makes them truly unique savings vehicles: HSAs offer Triple Tax Efficiency.   What does that mean?

  • Contributions are tax-deductible in the year they are made
  • Contributions may be invested in a diversified portfolio of cash, stocks, and bonds and can grow tax-free.
  • Withdrawals for qualified health expenses, now or in the future, are tax-free.

In other words, your HSA account is the only investment vehicle in the world that allows you to never pay taxes on contributions or withdrawals, or any intermittent gains, when used in a qualified manner.  Here’s a great chart from on how HSAs compare to Traditional IRAs and Roth IRAs from a tax perspective.

HSA Best Practice for Triple Tax Efficiency

Contribute Annually

Every year, if possible, you should max out your HSA contributions.  If you can’t quite hit the max, do you what you can.  But do contribute as it’s the best way to make a high deductible health care plan work in your favor.  Instead of the higher premium traditional plan, you get to pay a lower monthly premium and invest the balance in your HSA to be used when you need it – which could be years, if not decades in the future.       

Invest for the Long-Term  

Similar to your 401k or an IRA, HSA balances may be invested for long-term growth.  Most HSA providers have a suite of investments to choose from, and allow you to invest any amount over a couple thousand dollars.  We suggest you keep the amount of your health care deductible in cash and short-term bonds – so that it is there if you need it.  Going forward, once you have more money in your account than your deductible, start investing the balance for the long-term according to both your tolerance and capacity for risk.  Remember, HSA funds grow tax free, just like an IRA or your employer-sponsored plan.  So, allow your HSA to use the incredible benefits of compounding interest in your favor to maximize the funds available to you in retirement.

Use for Health Care Expenses in Retirement

Retirement is the ideal time to use your HSA.  You’ve contributed annually and you’ve invested the proceeds – now it is time to use your HSA for qualified medical expenses (tax-free) or, to use your HSA for retirement living expenses (taxed as personal income without penalty after age 59 ½ ).  Given that health care costs can be significant as you age, we suggest the former. This, of course, allows for the final arrow in the quiver of tax efficiency – tax-free withdrawals.  HSA funds can be used to pay for Medicare Premiums (though not supplemental plans) and Long-Term Care premiums in addition to an array of other qualified health costs. 

Last, if you have questions on how much you should contribute, how should invest, or how should use your HSA in retirement, we suggest you talk with a fee-only Certified Financial Planner™ to discuss your options.

Things to Note about HSAs

They Make for a Poor Checking Account

Many HSA providers charge monthly maintenance fees if the balance in your account balance is below a certain amount.  We have seen these range from $1/month to $4/month and they are ANNOYING.   Check the fine print and if you find that your current HSA provider charges a fee and you do not expect to surpass the minimum balance for a while change to another HSA provider that doesn’t assess a fee.

This brings up an important matter.  Best practices for your HSA are using it as a tool to grow the account over the long-term and then spending it down in retirement.  However, many people use it as a tax-efficient health care ATM.  They keep a low balance, don’t contribute regularly, and use the HSA to pay for any little health expenses that arise throughout the year.  Though this is better than not using an HSA at all, it is not best practice and you are missing out on the truly incredible benefits HSAs provide when used the right way. 

HSAs are Still a Part of your Rainy Day Savings

Often, when you need to tap into your Rainy Day Fund, it involves some sort of health emergency.  Mine certainly was.  This is a scenario where it may make sense to tap into your HSA and use it to pay for current health expenses.  In other words, it’s not about protecting the monies in your HSA at all costs, it’s simply about maximizing the benefits over a period of decades.  If you have significant health expenses in any given year, and you are unable to easily pay out of cash flow or other cash holdings – by all means, use your HSA.  That’s what it is there for.  But remember, your HSA is less street corner ATM and more of a rainy-day equivalent for significant health, or retirement, expenses.  

You can switch HSA Providers

Often, people feel as if they are stuck working with their Health Care Plans recommended HSA and put up with high account maintenance fees, low interest rates offered on savings account, and poor investment options for long-term investment.  Here’s the good news:

You are not beholden to any one HSA Provider. 

Yup, you read that right.  That HSA account that you opened after taking that one job – you can transfer it to another HSA provider.  Or, though this makes less sense, you can leave it there and start a new one elsewhere.  All to say you have options!

You can also choose to work with an HSA provider that isn’t recommended by your health insurance provider or workplace.  The HSA provider is a separate entity, and you can choose to work with whichever company you choose.

HSAs are not great legacy vehicles for your heirs

Should your heirs inherit your HSA account, the HSA loses its tax-exempt status and is inherited as taxable income in the year of inheritance for your heirs.  This isn't good, and provides significantly less options to your heirs than, say, inheriting a Beneficary IRA. 

For example, your children inherit your HSA and they are in a high-income bracket, the funds you dutifully saved could be gobbled up by taxes.    

The best strategy is to name your spouse as the beneficiary on the account, as your spouse is able to transfer your HSA into his or her name and use it accordingly. Barring that, the point of having an HSA is to use it for qualified health expenses, not just save it indefinitely.  So, make sure you come up with a plan for how you are going to spend down your HSA over the years.  

Expert Level Tip

HSAs can be used to pay for past medical expenses assuming you have maintained receipts and adequate records.  For example, let’s say you have more than enough money in your HSA account twenty years in the future.   Along the way, however, you paid for some health expenses out of pocket to the tune of $10,000.  Now, you’d like that $10,000 in cash for other expenses and you’d like your withdrawal to be tax-free if possible.   

There’s a solution for this, and we think it’s an expert-level way to use your HSA. 

As long as have saved your past receipts, you can have your HSA refund you money for past medical expenses.  In other words, you can take a tax-free distribution in the present, for expenses you paid out of pocket, or with other funds, in the past.  This is a great way to withdraw money out of your HSA in retirement or during a time when you need the funds, but you don’t to pay taxes, or a 10% penalty if you are under age 59 ½, on the proceeds.

Pretty Cool!


We think HSAs are incredible, and one of the best tools available for savers due to their Triple Tax Efficiency.  Remember, to get the most of your HSA do the following:

  • Contribute Annually
  • Invest for the Long-Term
  • Withdraw in Retirement (Ideally for Health Expenses)