Millions of savers overlook one incredibly underrated way to add extra oomph to their efforts to build a nest egg.
The health savings account (HSA) available to folks enrolled in a high-deductible health insurance plan is a great place to save for today’s medical expenses. But it might be an even better place to stash cash for your golden years.
Here are some key reasons to consider using an HSA to save for retirement.
1. It’s triple tax-advantaged
A health savings account’s huge selling point is the fact that it is triple tax-advantaged:
- You get a tax deduction during the year of the contribution.
- The money grows tax-free.
- You withdraw the money tax-free when it’s used for qualified health expenses.
In essence, if you use HSA money to pay for health care expenses, it’s never taxed. Never.
It’s tough to think of any other savings vehicle that offers such a powerful combination of tax incentives.
2. It can be a back-door IRA
This is one of the most overlooked — and misunderstood — advantages of an HSA. Many people think an HSA must be used to pay for medical expenses.
In fact, once you reach the age of 65, you can withdraw your HSA funds for any reason. Just as with a traditional IRA, you will pay income taxes on the withdrawal at that point. However, you will not pay any penalties. As the IRS states in Publication 969:
“Additional tax. There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040, 1040-SR, or 1040-NR.
Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.”
To recap: If you use HSA money for qualified medical expenses, it’s never taxed. But if you use it for other purposes once you turn 65, you only have to pay the same type of taxes you would on an IRA withdrawal.
However — and this is crucial to note — legislation has been introduced in the U.S. House of Representatives in recent years that attempts to eliminate the ability to withdraw money for nonmedical reasons without paying a penalty, according to CNBC.
History shows that the federal government sometimes changes longstanding rules related to retirement savings and income, disrupting the financial plans of retirees who were counting on these rules remaining unchanged.
If the law shifts so that seniors with HSAs no longer can withdraw money penalty-free for nonmedical expenses, it will make the HSA considerably less valuable as a retirement account. So, consider yourself forewarned.
3. There’s a sneaky way to avoid taxes on nonqualified withdrawals
If the idea of paying taxes on nonqualified withdrawals during retirement rubs you the wrong way, there is something you can do to eliminate such fees. But it probably only works if you plan ahead, and if you are a super-saver who delays tapping into HSA funds for many years.
Some people who open an HSA account do not use the funds to pay for current medical expenses. Instead, they leave their HSA money alone and dip into their taxable accounts instead to pay for annual medical expenses out of pocket.
Why on earth would you do that? Because it allows the HSA money to continue to compound tax-free for many years.
And here’s an additional strategy that the shrewdest of these super-savers often employ: Every time they rack up a new medical expense and use taxable funds to cover the bill, they take their medical receipts and file them away in a safe place.
They do this because these receipts can almost literally be converted to cash in future years. As it turns out, you can ask for reimbursement of your medical expenses at any point during your lifetime. According to IRS Publication 969:
“You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free.”
The key phrase, of course, is “at any time.” So, as long as your original expense was a qualified medical expense, you can make a withdrawal from your HSA to reimburse your costs many years — or even decades — later.
Let’s say you have a large amount of money in your HSA at age 65 and decide to buy a car. Theoretically, you could fund much or all of the purchase by making thousands of dollars in tax-free HSA withdrawals all at once. To do so, you simply have to make sure you can produce those receipts from yesteryear to prove the withdrawals are legitimate.
It’s a pretty neat — and totally legal — trick.
While news outlets such as Forbes have written about this strategy, it remains largely under the radar. You can find out exactly how to cash in with an HSA for medical expenses many years down the road by reading the rules at the IRS website. Scroll down to Q&A-39 to learn all about it.
4. It helps trim your medical costs today, as well as in the future
Everyone knows health care costs continue to soar. An HSA can help mitigate some of this financial pain by providing you with an upfront tax break that returns a modest amount of such costs to your pocket.
And you get that tax break now even if you don’t actually tap your HSA funds until years into the future. So, the HSA remains a great way to trim ever-growing health care costs, both now and in retirement.
5. You can use it to pay Medicare premiums
Here’s a dirty little secret about Medicare: It’s not free.
Of course, many of us know that. But others who finally qualify for the nation’s retirement health insurance plan are surprised that they need to shell out a substantial amount of money each month for coverage. In fact, for 2026, Part B Medicare premiums are $283 a month for most people and even higher for those with high incomes.
Fortunately, you can use the HSA funds you built up during your working years to pay these premiums, as well as premiums for Medicare Advantage plans and Medicare Part D prescription drug coverage. Because you are using tax-free money to make these payments, you can save a nice pile of cash by doing this over a long retirement.
6. It can be a great estate-planning tool
When you die, your health savings account does not travel with you to the great beyond. Instead, it remains behind on this earthly plane and can be used by loved ones to make their lives better.
If you name a spouse as a beneficiary, he or she will inherit the HSA and will be able to use it just as you did, with a right to tax-free distributions for qualified medical expenses.
If you leave the money to someone other than a spouse, it will be distributed to your heirs and will be fully taxable, however.
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