How Do I Use My HSA in Retirement?

Paying for medical expenses in retirement continues to be a top concern for Americans. Are there ways to maximize the benefits you receive from your employer?

Paying for medical expenses in retirement continues to be a top concern for Americans. While facing open enrollment, it can seem daunting to review your healthcare coverage options. You may feel that the coverage that you have today has taken care of your needs but are there ways to maximize the benefits that you are receiving from your employer? Are you considering the future impacts of these benefits and how they relate to your retirement plan?

While focusing on health insurance and the variables that come with it, it can feel like you are trying to consume alphabet soup. Here are saving account options that can help prepare you for future health care costs.

Flex Spending Accounts (FSA) can only be offered by your employer and have a contribution limit of $2,750 for the year. This limit does not include the amount that your employer may contribute on your behalf. Unlike other medical savings accounts, the funds placed in an FSA are set to expire at the end of the year and do not move with you if you separate from your employer. It is always a good idea to speak to your HR department to learn more about the rules of your account.

12/2019 update: Congress has authorized relief for unused funds in FSA for 2020-2022. Section 214 of the Taxpayer Certainty and Disaster Relief Act of 2020, permits employers to let employees carry over any unused 2020 balances for 2021, as well as 2021 for 2022. This change is up to the employer to adopt and it is not automatic across all FSA.

Health Reimbursement Accounts (HRA) can vary depending on the rules that your employer has put into place. You may find that the HRAs can only be used while employed, while other companies allow you to take the funds with you when you retire to help offset the cost of healthcare in retirement. One rule stands true with all HRAs, they can only be funded by the employer. It is essentially “free” money to use on healthcare expenses that won’t impact your taxable income. Again, it will be important that you speak with your HR department to learn more about the details of the HRA that they are offering.

Health Savings Accounts (HSA) are one of the very rare instances in the tax code where we can take advantage of the “Tax Trifecta”. You can save into this account with money that has yet to be taxed. You also are allowed to invest and grow your money without paying taxes. And finally, when you draw the money out for qualified medical expenses, no taxes will be levied. HSAs are portable, meaning you get to keep the account even if you separate from your employer. HSAs are an incredible tool and one that is often underutilized. However, HSAs do have several particular rules that we need to be aware of to fully maximize the benefit of these accounts.

1.High Deductible Healthcare Plan – To be eligible to contribute to an HSA, you must select a High Deductible Healthcare Plan (HDHP). Most group benefits will highlight the HDHP option during the open enrollment but eligibility comes down to what the deductible is. In 2021, an individual plan must have a deductible of at least $1,400 to be considered an HDHP. For a family plan, it is doubled to $2,800.

2. Contributions – There is a maximum annual contribution that can be made to an HSA, and unlike your 401(k), this limit does include any employer contributions. For 2021, assuming you are on an Individual HDHP, $3,600 can go into an HSA. If you carry a family HDHP, the contribution amount is doubled for a total of $7,200 for the year. Once you reach the age of 55, you can contribute an extra $1,000 “catch up” to your individual HSA. So if you only have one HSA for your family, it may benefit you to open an additional HSA in your spouse’s name in order for your spouse to save his or her catch up contribution. This would allow your contribution limits to increase by $2,000 for the year totaling $9,200 in contributions.

Also buried in the tax code is the ability to do a one-time transfer from your IRA to your HSA. The same contribution limits do apply, however, this allows you to take money that otherwise would be taxable and instantly turn it into tax-free funds! This “HSA Rollover” can only be done once per lifetime per individual.

The IRS is not concerned about what company that you choose to keep your HSA funds with, so you must explore all your options. The simplest solution may be placing funds into the HSA company that is associated with your group benefits, however, that may not be the best option. You want to have a company that offers a robust menu of investment options and does so at a low cost.


3. Age 65 – The rules change when you reach the age of 65. The first and most important thing to know is that you need to stop funding your HSA six months before electing Medicare (unless you elect Medicare to begin on your 65th birthday). This is to avoid making excess contributions and incurring a tax penalty. The HSA will remain as a spending account for your medical expenses, and if you enjoy the continued flexibility of medical spending accounts, you can select a Medicare Savings Accounts (MSA) as a part of your supplemental Medicare solution. (MSAs are unique to Medicare. More information can be found here.)

Furthermore, once you reach the age of 65, there is no penalty for drawing from your HSA for any reason. If the distribution is used for anything other than medical expenses, you will pay taxes on the entire distribution (like your IRA).


4. Reimbursements – There is no reimbursement deadline for medical expenses you incur. For example, you could go to the doctor in 2021, save your receipt (electronically, of course, since paper receipts fade over time), and reimburse yourself for this expense when you retire in 2030. The benefit to this is that the money that has been in your HSA since 2021 can be invested and earn interest tax-free over that time. So, your account balance now has the opportunity to increase its purchasing power. While you are reimbursing yourself for a qualified medical expense (see IRS Publication 502) and therefore receiving the distribution tax-free, you are free to place that money in your checking account and spend it on whatever you’d like.

So, how do we use the HSA to maximize its benefit towards our holistic plan? At Great Waters Financial, we challenge our clients to think of their HSA as their “Healthcare IRA”. Rather than this being an annual spending account, the HSA can serve a far greater purpose. By saving, investing, and growing your contributions, you may end up with a significant bucket of tax-free money to pay medical expenses. Knowing that you are well prepared for retirement medical expenses will allow you to focus on what retirement is all about, Living Greatly.


Great Waters Financial takes an educational first approach with all our communications. If you would like to learn about the impact of these options on your overall retirement plan, contact us to schedule a complimentary consultation. And remember, an investment plan is not a retirement plan.

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