Health Savings Accounts as a Retirement Plan

There has been a focus on Health Savings Accounts (HSA) in recent years. This is a valuable vehicle that extends even beyond the "triple-tax-free" benefit that most employers are aware of. HSAs can reduce taxable income in retirement, which may affect Medicare premiums and the portion of Social Security benefits subject to federal income tax.

There are many questions that revolve around HSAs and so we will attempt to address them here.

 HSAs and 401(k)s

For people who have both 401(k) and an HSA, one of the biggest questions is which account to fund first. Both accounts serve as vehicles for financial wellness. However, the HSA has a distinct advantage over the 401k. Even though an HSA has a lower annual contribution limit, it offers more flexibility. HSAs receive no threat for Federal or State income taxes at time of contribution or for withdrawals for qualified medical expenses. An HSA can serve as a supplementary retirement account since distributions after age 65 are not penalized when used even for non-eligible expenses. And more and more HSAs are including an investment option to grow balances and any investment gains are tax-free/tax-deferred.

HSAs and Medicare-

Traditional Retirement savings accounts such as ROTH/IRA/401(k)s have Required Minimum Distributions (RMD). This occurs whether the money is needed or not and may even place individuals into a higher tax bracket. This is problematic because when consumers enroll in Medicare, there are Medicare Premium surcharges on Medicare Part B and D, known as Income-Related Monthly Adjustment Amounts (IRMA), for high-earning enrollees. Alternatively, HSAs don’t affect Medicare premiums, because there are no required distribution of the funds. HSA accountholders, a growing number of which are turning 65 and becoming eligible for Medicare, can use their HSA funds to pay for Medicare premiums tax-free as well.

HSAs and Social Security Benefits

Using an HSA instead of an IRA for medical expenses is preferred when you are collecting Social Security benefits. Not only is the use of the HSA funds tax free, it also has no impact on your provisional income. Provisional income is the amount that is used to determine the portion of your Social Security benefit that can be included in your taxable income. When the provisional income increases, a larger portion of the Social Security benefit is included in taxable income.

For a single filer, when the total provisional income is less than $25,000, none of the Social Security Benefits are included in taxable income. When provisional income is $25,000 to $34,000, 50% of Social Security Benefits are included, and when provisional income is over $34,000, 85% is included. (A similar structure is in place for joint filers.)

Here is an example of two similar taxpayers, one with an HSA and one that uses IRA money for their medical expenses:


Taxpayer using an HSA for medical expenses

Taxpayer using an IRA for medical expenses

Social Security Income









IRA Distribution for Medical Expenses






Total Provisional Income

(Only half of SS benefits are included, and money spent from the HSA is not included.)






Total Taxable Income

(Depending on the provisional total, different SS amounts are included, and money spent from the HSA is not included.)












Savings for the HSA accountholder




In summary, while consumers should aim to pay themselves first as the contribution limits are higher in a 401(k), one should also consider employer match and the tax advantages at all stages of funding the account and collecting benefits in retirement. Those HSA-eligible Americans who reach 65 years of age will have greater flexibility to spend HSA dollars after age 65 without the 20% penalty for spending on non-eligible expenses. But HSAs are not just an emergency savings account. If participants have the ability to accumulate the funds and potentially increase the spending power of retirement savings, they will enjoy many additional benefits.