Think beyond short term: Using HSAs for retirement planning

Health savings account paperwork on a table

Help clients uncover the long-term benefits of health savings accounts (HSAs).

Key Points

  • While HSAs have appealing near-term tax advantages, the accounts also have long-term benefits and should be considered as part of an overall financial plan. Financial advisors are in an ideal position to educate clients about the potential of HSAs to help manage rising health care costs in retirement.

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. HSAs have three inherent 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 from 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  • Funds can be withdrawn from HSA accounts for any reason without penalty after age 65, (though income taxes will be owed if the money is used for non-qualified expenses).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.

Rising health care costs spur HSA growth

HSAs have grown increasingly popular over the years in large part because of rising health care costs and insurance premiums. The Milliman Medical Index, one proxy for the cost of health care in the United States, has been increasing at an average of more than $100 a month for the past 10 years, bringing the total annual cost of health care for a typical American family of four up to $26,944.4

As insurance premiums have risen, more employers have moved from preferred provider organizations (PPOs) to HDHPs. Among firms offering health benefits in 2017, 24% offered an HSA-qualified HDHP or an HDHP in combination with a health reimbursement account (HRA), compared with just 4% in 2005.5

The number of HSA accounts has swelled as a result. At the end of June 2018, there were 23.4 million HSA accounts, up from 6.8 million at the close of 2011. HSA assets, meanwhile, have grown to $51.4 billion from just $12.2 billion in 2011.6

Getting up to speed: HSA basics

Here are the essential things you need to know about HSAs. As always, make sure your clients check with their accountant about their specific tax implications. And look to the IRS as the authority on the latest rules and regulations. 


  • HSAs are available to those who are covered by high-deductible health plans. 
  • To be HSA-eligible, 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
    • Enrolled in Medicare 
  • Other plan requirements may be applicable.


Individual and family coverage plan thresholds for deductibles, maximum annual out-of-pocket expenses, and contribution limits may change annually. Check for the latest updates. 


  • Are free of penalties and taxes if they are used to pay for or reimburse qualified medical expenses
  • Are subject to income tax and a 20% penalty for non-qualified medical expenses before age 65 (Starting at age 65, non-qualified medical expenses are subject to income tax only.)

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

    The opportunity inside the story

    Despite the rising popularity of employer-offered HSAs, few employees are using them to their full effect, said Peter Stahl, a longtime consultant to financial advisors who focuses on the health care challenges in retirement. Stahl recently spoke at a Schwab event titled "Accumulating Wealth Through Health Savings Accounts." He said that by enjoying the HSA tax benefits today, account holders are leaving money on the table that they may want or need during retirement. 

    "When you think about your clients, recognize about 3 in 10 are utilizing a high-deductible [plan] with an HSA account," said Stahl, adding that advisors and their clients should be "thinking about [an HSA] as an investment account, not as a savings account" for covering health care expenses.

    The main argument for holding onto HSA assets and letting them grow is that an individual’s health care burden is likely to be a lot higher in retirement. A recent study by Employee Benefits Research Institute found that some retired couples would need as much as $370,000 to cover medical expenses in retirement—a forecast that is growing every year.7 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.8 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 said.

    This opportunity inside the story is getting out. According to a recent report from Devenir Research, while only a small share of HSA assets is currently being invested, this portion is growing faster than the overall total. As of June 2018, HSA investment assets jumped an estimated 45% compared with the year before, on target to reach an estimated $9.8 billion. That growth was more than twice the pace of the 20% rise in total HSA assets.9

    2018 Midyear Devenir HSA Research Report chart showing growth in HSA investment assets
    Source: 2018 Midyear Devenir HSA Research Report

    But with only 18% of HSA assets in investments last year—and many HSA accounts not even funded—there's ample scope for investment growth going forward. The wealthier the account holder, the more likely they can pay for the near-term medical costs out of pocket and allow their HSA assets to grow and be used in their retirement years.   

    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. Providing proactive support to clients well before they retire enables them to consider integrating HSA savings into their long-term planning strategies. This can potentially position them much better to 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."

    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 might be good enough, but management fees are another consideration. They can also help the client understand the fees associated with moving money in and out of the account. In some instances, the client might want the advisor to manage their HSA assets for a fee (if allowed by the plan). 

    At a time when traditional investment management services are coming under pressure, health care planning represents an opportunity for financial advisors to provide more comprehensive financial support. And given the emergence of HSAs as an attractive complement to existing retirement savings accounts, it's a natural extension of planning conversations with clients. 

    Starting the conversation

    Financial advisors looking to provide this kind of support can start with a few simple questions, asked 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 such 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. Walk them through a hypothetical example to support the argument. See Stahl's illustrative example.
    • Does your HSA offer a good array of investment choices? Go over the options available to them and help 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 and more financial advisors are focusing on helping clients save for health care costs. As noted above, people are increasingly worried about how they’re going to meet their health care needs in retirement and whether that obligation will eat away at 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.

    About Peter Stahl

    With 29 years of experience in the financial services industry, Peter Stahl is the president of Bedrock Business Results, a consulting firm designed to help financial advisors understand and find solutions to the health care challenges their clients face during retirement. He is also the founder of WealthWatch, an innovative resource center that provides content on retirement health care issues. An author and industry speaker, Stahl holds a bachelor’s degree in economics and business administration from Gordon College. He is a CERTIFIED FINANCIAL PLANNER™ professional.

    We hope these ideas inspire you to think about new ways to serve your clients when it comes to retirement planning.

    If you're thinking about becoming an independent advisor, consider a custodian that invests in your success. Contact us to learn more about the benefits of a custodial relationship with Schwab.


    Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, U.S. Internal Revenue Service, 2017. Tax laws vary by state. For example, Alabama, California, and New Jersey do not allow state income tax deductions. 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

    Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, U.S. Internal Revenue Service, 2017.

    4 Christopher Girod, Sue Hart, and Scott Weltz, 2017 Milliman Medical Index, Milliman Research Report, May 2017.

    2017 Employer Health Benefits Survey, Kaiser Family Foundation/Health Research & Educational Trust, September 19, 2017. An HRA is a health care savings vehicle funded entirely by the employer, and any money remaining in the account stays with the employer when the term of employment ends.

    2018 Midyear Devenir HSA Research Report, Devenir, August 22, 2018.

    7 Paul Fronstin and Jack VanDerhei, "Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up From $350,000 in 2016," EBRI Notes, Vol. 38, No. 10, Employee Benefit Research Institute, December 20, 2017.

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

    2018 Midyear Devenir HSA Research Report, Devenir, August 22, 2018.

    Based on Peter Stahl's IMPACT® presentation, "Accumulating Wealth Through Health Savings Accounts," November 2017.

    The information provided here is for general informational purposes only and should not be considered specific, individualized, legal, tax, or investment advice. Where such advice is necessary or appropriate, please consult with a qualified tax advisor, CPA, financial planner, or investment manager.