Here's Why I Treat My HSA as a Retirement Savings Plan

A health savings account, or HSA, is an account I've only had for a short while now. Previously, the health insurance plans I was enrolled in weren't compatible with an HSA.

But since 2022, I've been on a high-deductible health insurance plan. And while that does have me paying more money out of pocket, the upside is that I get HSA access. Since I have family coverage, we're allowed to contribute up to $8,300 to an HSA this year. That $8,300 goes in tax free, so we shield that much income from taxes, which is a big win.

Now, the nice thing about HSAs is that you can access your balance at any time. I could, for example, withdraw funds tomorrow to pay for medication. But I also don't have to use up my HSA balance by the end of the year, or by any specific deadline.

Because of this, I actually make a point to treat my HSA like a retirement savings account rather than an account I access for near-term medical costs. Here's why.

Taking advantage of tax-free growth

The money you put into an HSA and don't use right away doesn't have to just sit there. You can invest your HSA to grow your money into a larger sum over time. And investment gains in an HSA are tax free, so that's a nice perk.

Over the past 50 years, the stock market has averaged an annual 10% return. So let's say I contribute $8,300 to my HSA this year, invest it in stocks, and leave that money alone for 20 years. At that point, my $8,300 contribution should be worth about $55,800. That's a gain of $47,500. Only I won't owe the IRS a chunk of that $47,500 due to the tax-advantaged nature of HSAs.

As you might imagine, the reason you get such neat tax breaks in an HSA is because you're supposed to be using the money for healthcare costs. And as such, withdrawals taken for non-healthcare expenses generally incur a penalty.

But here's another really cool thing about HSAs. Once you turn 65, you can withdraw from your account for any reason without facing a penalty. So that's really why I take the approach of using my HSA as a retirement savings account. This doesn't mean I'm not planning to use it in retirement to pay for medical bills. But I also know that savers get the flexibility to use their HSA funds for any purpose come age 65.

You may want to leave your HSA alone, too

There's nothing wrong with taking HSA withdrawals to pay for near-term medical bills. That's what that money is there for.

But if you can avoid tapping your HSA during your working years (or at least some of it), you could end up with a lot of money in that account by the time your senior years roll around. And you might also enjoy a world of gains that the IRS can't touch.

Of course, to leave your HSA alone, you will need to make sure to pad your savings so there's money in there for medical bills. In fact, I have a separate savings account earmarked for medical bills outside of my general emergency fund.

It's also a good idea to factor medical expenses into your budget. Right now, for example, we allocate several hundred dollars a month to healthcare outside of our insurance premiums so we have the option to leave our HSA untouched.

But all told, perhaps the best way to maximize an HSA is to leave your money untapped for as long as possible. So if that's something you can swing, you may end up really happy once retirement rolls around.