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Healthcare Costs in Retirement: Maximizing HSA Tax Benefits

February 16, 2024

Healthcare Costs in Retirement: Maximizing HSA Tax Benefits


Points of Impact

  • Enjoy quadruple tax benefits
  • Utilize delayed withdrawals for medical expenses
  • Penalty-free withdrawals after 65
  • Take advantage of employer contributions


Are you familiar with Health Savings Accounts (HSAs)? If not, you could be missing out on an incredibly valuable tool to enhance your retirement plan.


An HSA is a specialized savings account that offers tax advantages specifically for healthcare-related expenses such as copays and prescriptions. Similar to a 401(k), contributions to an HSA can grow over time, and any unused funds roll over from year to year. However, the true power of an HSA lies in its potential to significantly boost your retirement savings.


Here are four compelling reasons why opening an HSA can be a game-changer when it comes to your retirement:


Enjoy quadruple tax benefits

An HSA is widely regarded as the ultimate savings vehicle, and for good reason:

  • Contributions are tax-free
  • Contributions are also pre-Federal Insurance Contribution Act (FICA)
  • Growth is tax-free
  • Withdrawals are tax-free when used for qualified medical expenses


Before we delve further, let's clarify the distinction between tax-free and pre-FICA contributions. Tax-free contributions are exempt from federal and state tax deductions, but they are still subject to FICA tax deductions, which include Medicare and Social Security. On the other hand, HSA contributions are both pre-tax and pre-FICA, meaning they are exempt from all deductions.


These four tax benefits make HSAs an invaluable asset in covering medical expenses, which tend to be a significant portion of retirement costs.


For 2020, the contribution limits for HSAs are $3,550 for individuals and $7,100 for families. Individuals aged 55 and above can contribute an additional $1,000 per year.


By leveraging the power of an HSA, you can effectively manage and mitigate healthcare costs in retirement while maximizing your tax advantages.


Delayed withdrawals for healthcare expenses

Using tax-advantaged dollars from your HSA funds to cover medical expenses is a no-brainer. But you don’t have to withdraw those funds right away; you can do so later You could pay for medical expenses out of pocket, then make delayed withdrawals from your HSA years later.

Let’s say you’re able to cover your medical expenses out of pocket, without the use of your HSA. You could still contribute money to the HSA to take advantage of its tax benefits, thus giving those funds the chance to grow over the course of time. Years later, when you’re ready to withdraw those funds, use your receipts to justify that the withdrawal is for qualified medical expenses, in case you're audited by the IRS, and get reimbursed for those costs that you previously covered out of pocket.

What’s the benefit of getting reimbursed years later rather than right away? By keeping those funds in the HSA for years, they have more time and opportunity for those funds to grow. Money withdrawn from an HSA immediately doesn’t have as much time to grow in the account.

Consider this example: You discover that you need eyeglasses, which cost $200. You have that $200 in your HSA, so you have a choice:

  • Withdraw that $200 from the account right away to reimburse yourself, or
  • Pay the $200 out of pocket, keep the $200 in HSA funds within the account, and hope that years from now, that $200 has incurred growth within the HSA

As long as you can cover some or all of your medical expenses out of pocket, this method could result in higher returns on your HSA contributions, which would mean more money in your account that you didn’t have to contribute yourself.

The money you withdraw could be used however you see fit, like supplementing your other retirement funds.

After 65, penalty-free withdrawals

If they're made for non-medical expenses, HSA withdrawals are taxed and you can incur a 20% tax penalty on top of it. However, once you turn 65 years old, all withdrawals are penalty-free, even if they’re for a non-medical expense. Non-medical expenses are still subject to income tax.

That means you could continue to let leftover HSA funds grow into retirement and withdraw them at a later date. Or, you could withdraw those funds at 65 and delay withdrawing from other retirement funds, like your 401(k) or IRA. That extra source of retirement income can have tremendous value.

Employer contributions

Most employers contribute to their employees’ company HSAs. These funds put more tax-advantaged money to work for you. That could add up in a big way when you consider that any growth and withdrawals are tax-free.

What to remember

Healthcare is a major expense in retirement, so having tax-advantaged funds on your side to help soften the blow is key. HSAs can be a valuable asset to any retirement plan, but to have an HSA, you must have what is known as a high deductible healthcare plan (HDHP), which has a lower premium and a higher deductible. Check with your employer to see if you’re eligible for an HSA since not all HDHPs are HSA-qualified.

If you manage to avoid major healthcare expenses, your HSA funds could be withdrawn tax-free after age 65 to cover other retirement expenses.

More information

Every retirement plan is different. Learn how a Registered Fiduciary like myself can help you see if you are on track to reach your retirement goals. 

Thank you for your interest

Get in touch:

Gloria Jean Cosentino, RF

Direct (630) 306-1703