Think beyond short term: Using Health Savings Accounts for retirement planning

Health Savings Accounts and Retirement Planning

Key Points

  • While HSAs (health savings accounts) can provide near-term tax advantages, they can also provide long-term benefits.

  • Health costs tend to go up as we get older. Clients who invest their health savings through an HSA now can grow the money available to help manage rising expenses in the future.

  • Financial advisors are in a unique position to help educate clients about the potential long-term benefits of HSAs.


As we get older, health care costs tend to go up. Yet, many people don't factor this in when planning their finances for the future. A way you can help your clients save for future health expenses and even invest to stretch those dollars further is by starting a health savings account (HSA).

This tax-advantaged savings option can help clients get ahead of rising healthcare costs while keeping their money invested so that it can grow over time.

A triple tax advantage

HSAs were established as part of the 2003 Medicare Modernization Act to help individuals with high-deductible health plans (HDHPs) cover qualified costs related to health care. HSAs are tax-advantaged savings accounts that may feature investment account options, depending on the account administrator, and have three tax advantages:1

  1. Contributions are tax-deductible.
  2. Investment growth and interest are tax-exempt.
  3. Withdrawals for qualified health expenses are tax-free.2

Other basic HSA account benefits include:3

  • Savings accrued in HSAs can be rolled over year to year, meaning there's no "use it or lose it" provision as is the case with flexible spending accounts (FSAs).
  • Funds can be withdrawn from HSA accounts for any reason without penalty after age 65, (though income taxes will be owed if the money is used for non-qualified expenses).
  • Eligible HSA owners may make the maximum contribution allowed each year regardless of how much they save in other retirement plans, such as IRAs and 401(k) plans. HSA owners 55 and older are allowed to contribute extra.

Basically, clients can protect their health care dollars from taxes, grow those dollars tax-free, and any money not used on health care can be treated as retirement savings after the age of 65.

HSAs are rising in popularity

The rise in health care costs has made HSA-qualified HDHPs more attractive to companies and employees. Among firms offering health benefits in 2022, 28% offered an HSA-qualified HDHP or an HDHP in combination with a health reimbursement account (HRA), compared with just 4% in 2005.4

In addition to being covered by a high-deductible plan, an individual cannot be covered by another health plan (except as permitted by the IRS), claimed as a dependent on another person's tax return, or enrolled in Medicare. As always, make sure your clients check with their accountant about their specific tax implications.

Clients don't have to pay penalties or taxes if disbursements are used to pay for or reimburse qualified medical expenses. However, for non-qualified medical expenses before 65 there is a 20% penalty.

Refer to these IRS resources when educating and sharing information with clients:

Planning for longevity

Despite the rising popularity of employer-offered HSAs, few employees are using them to their full capability, says Peter Stahl, a longtime consultant to financial advisors who focuses on health care challenges in retirement. By ignoring HSA tax benefits, many people are leaving money on the table that they may want or need during retirement.

The main argument for investing and growing HSA assets is the likelihood that health care costs will be a lot higher in retirement. A report from the Employee Benefit Research Institute estimates a 65-year-old couple could need as much as $383,000 in savings to have a 90% chance of covering their health care expenses—including premiums, deductibles, prescriptions, and out-of-pocket costs—in retirement.5 Longer lifetimes and uncertainty around the future of Medicare make it even more important for savers to account for health care costs in their financial planning.6 Stahl adds that more than two-thirds of employees cite health care expenses as their top worry about retirement.

"The reason why this is so important is that when you look at the surveys over the years about what your clients are most concerned about moving into retirement, it's longevity and the prospect of outliving their income," Stahl says.

Supporting clients through education

Stahl believes that, as fiduciaries, financial advisors have a key role in providing education about the use of HSAs as long-term savings vehicles for health care expenses in retirement. Proactive support to clients before they retire enables them to grow their HSA savings and plan for health costs. This can position them to better manage financial obligations in retirement.

As an example, Stahl brought up Medicare premiums, which many retirees pay out of their Social Security benefits. "When this client is sitting in your office, and they are retiring and they're enrolling in Medicare, and you can say, 'How would you like to pay those Medicare premiums with a tax-free withdrawal from your HSA?'—think about the value you are adding to this relationship," he says.

Financial advisors can also help their clients sort out whether their current HSA custodian offers investment options, Stahl said. For many, a diversified list of mutual fund options may be good enough, but in some instances the client may want the advisor to manage their HSA assets for a fee (if allowed by the plan). Even if an advisor cannot manage the assets directly, they can help clients understand management fees, including fees associated with moving money in and out of the account.

As RIA firms continue to explore the best ways to serve clients, health care planning represents an opportunity to provide more comprehensive financial support.

Starting the conversation

Financial advisors looking to provide this kind of support can start with a few simple questions during a regular planning session or as part of an impromptu conversation about managing health care costs in retirement:

  • Do you have a high-deductible health plan? If the answer is no, then the conversation becomes an opportunity to discuss planning for health care and other costs in retirement and whether it might make sense to consider an HSA in the future.
  • Are you contributing to your HSA? Many HSAs go unfunded every year. Your client may not understand how they work. Spell out the basics and benefits of these accounts before getting into the long-term planning discussion.
  • Are you spending your HSA contributions? Those who are actively using their HSA accounts to manage day-to-day health care expenses might not understand their triple tax advantages, which favor investing HSA assets rather than using them right away.
  • Does your HSA offer a good array of investment choices? Go over the options available to them and help them decide whether a better alternative might be available. You can also help them analyze the fees they are being charged.

Adding to your playbook

There's a reason more financial advisors are focusing on helping clients save for health care costs. People are increasingly worried about how they're going to meet their health care needs in retirement and whether that obligation will eat away their hard-earned savings.

HSAs offer advisors another opportunity to proactively address these common client anxieties and concerns. And in doing so, advisors can take another step to deepen client engagement, inspire referrals, and achieve a competitive advantage. In Stahl's opinion, this makes understanding HSAs a very promising addition to every financial advisor's playbook.

What you can do next


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1 Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, U.S. Internal Revenue Service, 2023 Tax laws vary by state. Be sure to check your state’s tax laws or consult a certified public accountant.

2 Penalties (e.g. withdrawals for non-qualified health expenses) exist. Check IRS.gov.

3 Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, U.S. Internal Revenue Service, 2023.

4 2022 Employer Health Benefits Survey, KFF, October 2022

5  Projected Savings Medicare Beneficiaries Need for Health Expenses Remained High in 2022, EBRI, February 9, 2023.

6 "Medicare Will Run Out of Money Sooner Than Expected, Report Warns," PBS News Hour website, June 5, 2018.

Please visit www.irs.gov to learn more about IRS tax guidelines or consult with you tax professional. Schwab provides referrals to unaffiliated, third-party health savings account (HSA) providers, who use Charles Schwab & Co., Inc., brokerage services for the investment portion of their HSA programs.

Schwab is not responsible for the services provided by these HSA providers. The Schwab Health Savings Brokerage Account is offered through Charles Schwab & Co., Inc. (Member SIPC), the registered broker-dealer, which also provides other brokerage and custody services to its customers.

Eligibility for an HSA requires coverage by an HSA-eligible high-deductible health plan and does now allow coverage by another ineligible health plan or enrollment in Medicare.

See IRS Publication 969 for the most current information defining HSA eligibility, contribution limits, and more about HSA-eligible health plans.

The Charles Schwab Corporation provides services to retirement and other benefit plans and participants through its separate but affiliated companies and subsidiaries: Charles Schwab Trust Bank and Charles Schwab & Co., Inc.
Brokerage products and services are offered by Charles Schwab & Co., Inc. (Member SIPC at www.sipc.org). Trust, custody, and deposit products and services are offered by Charles Schwab Trust Bank, Member FDIC.