At the end of 2024, 59.3 million Americans were covered by health savings accounts (HSAs). That's because -- unlike money in a flexible spending account (FSA) -- funds contributed to an HSA can be rolled over yearly, allowing you to build a balance. According to the investment company Devenir, which specializes in HSAs, the average HSA balance is now $3,731. For those aged 55 and older, the average balance increases to $6,564.
For those who plan ahead, even a modest HSA balance can be a game changer in retirement. Here's how.
Image source: Getty Images.
What makes an HSA special?
At first glance, there may not appear to be anything special about HSAs, but a closer look reveals some pretty sweet details.
HSAs are pretax savings accounts, meaning you don't pay taxes on the money when it's contributed. Although these accounts are only available to those with high-deductible health plans, they do far more than cover medical expenses.
The money in an HSA can also be rolled over annually. If you ended a year with $3,000 in your account, that $3,000 would automatically carry into the following year, and any future contributions will continue to increase your balance.
Because the balance rolls over, investments and contributions in your HSA are able to grow tax-free like a retirement vehicle, helping you save even more for your golden years. Even if you're already contributing to other retirement plans, you can contribute $4,300 annually to your HSA if your health plan covers only you. If your health plan covers your family, you can contribute $8,550. In addition, if you're 55 or older, you can contribute an extra $1,000 per year.
Unlike other retirement plans, however, you don't have be near retirement age to use your HSA funds -- withdrawals to cover qualified medical expenses are tax-free, regardless of your age. Otherwise, withdrawals to pay non-medical expenses are taxed at your ordinary tax rate. If you're under 65, you may also face a 20% penalty on the amount withdrawn. However, once you turn 65, no penalty applies, even if you spend the money on non-medical expenses.
The power of compounding
When you own an HSA, you have options. You can use it all to pay medical expenses. You can use part of it now to cover medical-related costs and invest the rest for retirement. Or you can pay medical expenses out of pocket while you're still working and invest the entirety of your HSA contributions.
Let's say you give your HSA room to grow by maxing out your contribution and investing all of it each year. Assuming your annual contribution remains constant at the limit for 2025 (the limit will change each year due to inflation), here's how compound growth can increase your balance if you earn an average annual return of 7%.
|
Amount invested annually |
Number of years |
Account balance |
|---|---|---|
|
$4,300 (self-only coverage) |
20 |
$181,866 |
|
$8,550 (family coverage) |
20 |
$361,620 |
Data source: Calculator.net. Table by author.
Imagine retiring with thousands of dollars extra to spend on healthcare. Those might include long-term care insurance, in-home care, prescription costs, medical deductibles and copays, or vision and dental care.
You can also draw from it when it's time to pay for extras, like travel, hobbies, or special occasions. While you'll have to pay taxes on any funds not used for medical expenses, an HSA still provides an extra tax-advantaged source of retirement income.
You can let it grow
While you must take required minimum distributions (RMDs) from most retirement accounts once you reach age 73 (or 75, if you were born in 1960 or later), the same is not true of HSAs: You can let the funds in your account grow for as long as you'd like.
When it comes to saving and investing for retirement, it can often feel like you have little control of the things going on around you. The HSA, however, offers incredible financial flexibility, letting you decide how you want the account to work for you, both now and in the future.
