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Should you use a Health Savings Account (HSA) to save for retirement? That’s the question a listener to the Dough Roller Money Podcast asked recently. Here’s Mike’s email:

Hi Rob, I have a question about my HSA at work. I have about $14,000 in it. I have not used it at all in the past as I have not had any significant medical expenses. This year I have medical expenses of about $5000. I have already paid the medical bills with non-HSA money. I would like to leave all of the money in my HSA year after year until I retire and use that money as a pseudo-retirement account. My question is should I withdraw the $5,000 from my HSA this year to cover my medical expenses? If I pay for the medical expenses with HSA dollars then I am paying with pretax money and therefore saving on the cost of the medical expenses. But then I lose the benefit of tax-free earnings over the next 15 years or so before I retire.

Here are some details about me in case they are relevant in this decision. I am 47 years old. I am fully funding my 401(k) at work and have some taxable mutual fund investments through Vanguard. I have not invested in an IRA yet but this is the first year I plan to do so. I am single and my income is about $150,000 per year.

One other question… When I open up my IRA this year, should I open up a Roth IRA or a traditional IRA?

Thanks for your Podcasts. I really enjoy them. By listening to them I feel like I am getting a degree in personal finance and investing for free.


I’ve covered my views on the Roth IRA vs traditional IRA decision, which you can check out in Podcast 90. Mike’s question about his HSA is an important one, particularly for those who want to save more for retirement than allowed by a 401k and IRA.

Like so many personal finance choices we face, there is no clear “right” or “wrong” answer here. Instead, the best approach will vary from person to person and depend, in large part, on an individual’s financial goals. With that said, let’s look at using an HSA for retirement, along with the advantages and disadvantages of this approach.

HSA–A Quick Refresher

An HSA enables those with a high deductible health insurance policy to save money on a tax-free basis. Contributions to an HSA are pre-tax, and withdrawals for medical expenses are tax-free as well.

Unlike a flexible spending account, the funds in an HSA do not have to be spent each year. They can be accrued from year to year until retirement. Money can be withdrawn for non-medical reasons at age 65 without penalty, although the withdrawals will be taxed at ordinary income rates. These features make an HSA a potential retirement savings option.

See also: Our Detailed Guide to Health Savings Accounts

Understand Your Options

At first glance, the options may seem obvious. Mike can either use the HSA money to pay for his medical expenses, or keep the money in the tax-deferred account and use out-of-pocket money. What can often be overlooked, however, is a third option–using a combination of both approaches.

For example, he could decide to use $2,500 of the HSA funds to pay his medical bills, while paying the remainder from his after-tax money.

Read: The Lowdown on Health Savings Accounts as Retirement Savings Vehicles

What’s the Best Use of the Money?

A key question is how Mike will use the $5,000 out of pocket if he uses his HSA funds to pay the medical expense. In effect, we are trying to determine the highest and best use of the money (the true and elusive definition of “cost of capital,” by the way). While this will vary from one individual to the next, here are some potential uses of the money:

1. Invest in an IRA (traditional or Roth)
2. Invest in taxable account (if one has already maxed out IRA)
3. Pay down debt
4. Fund a 529 plan
5. Bulk up an emergency fund

One comment about the above list. If you are not maxing out your 401k and IRA, there’s no reason to use your HSA as a retirement account. That said, the best approach will depend on your specific circumstances and financial goals.

Read: Where to invest When You’ve Maxed Out Contributions to Retirement Accounts

What are your goals?

For Mike, his goal may be to maximize his retirement savings. If he’s fully funded a 401k and IRA, keeping the money in his HSA may be the best way to maximize his tax-advantaged retirement savings.

For others, the primary goal may be to get out of debt. In that case, it may be better to use the HSA funds for the medical expenses and apply the $5,000 to high interest credit card debt.


There are two key advantages to using an HSA for retirement:

  • Enables one to save more for retirement in a tax-advantaged account
  • The money in an HSA can be used for medical expenses at any time, if necessary


There also are some disadvantages:

  • Investment options in some HSAs are not very good
  • The money can’t be withdrawn for non-medical expenses without penalty until age 65
  • The money placed in an HSA can’t be used for other purposes, like getting out of debt

Read: Tax Breaks for HSAs

Lively HSA is a great place to begin looking into an HSA. Lively allows you to save or invest with your HSA and there’s no cost to open an account or any monthly fees. See how Lively compares to competitors in our list of Best HSA Accounts.
Open a Lively HSA or read our full Lively HSA review

Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Matt Irvine says:

As a fellow Virginian I love to see you counseling and bringing attention to the HSA. I would like tackle two of your assumptions above:

1) Max out your 401K and IRA first. Why? I agree you should get an matching funds (free money) first and then suggest you max out your HSA before going back to an IRA or 401K.This makes sense if you choose the right HSA. At Health Savings Administrators (www.HSAadministrators.com) you can invest first dollar in up to 22 Vanguard Funds (12 Admiral Class Shares). These average 20 bps per fund versus most 401K funds that hit 100bps w/ expense ratios, loads, minimums, 12b-1 fees, etc.
**Your 401K and IRA will be taxed. That is either a hit you take up front with the Roth or later in retirement with distributions. You get double tax savings with a 401K and IRA. The HSA gives you “triple” tax savings. The money goes in tax free/tax deductible, grows tax free with Vanguards excellent options, and come out tax free for eligible medical expenses. Your caller should leave the $5K in the Vanguard Funds – let it roll – and then take a $5K tax free withdrawal for all those “shoe-boxed” expenses in retirement. Or use the HSA post-65 to pay for the Fidelity estimated $240K a couple will have in retiree medical expenses (ie., Medicare premiums, copays, deductibles, vision, dental, etc).

2) Disadvantage – (Poor Investment Options) This is not true. You can get into Admiral Class Vanguard funds with no minimums first dollar via HSAadministrators.

Love to talk with you more to better serve your clients. HSAs are evolving and are hands down one of the strongest retirement vehicles for those with qualified health plans.

andrea says:

I thought that one could only use HSA dollars for medical expenses and COBRA premiums. Was suggested below could use for Medicare Part B premiums. Anyone have clarity on if can use HSA dollars to pay for health insurance? I want to use mine for individual policy pre-medicare in early retirement but thought I could not do (other than COBRA). Thanks for any insight.

Matt Irvine says:

Where are my previous comments? Love to create a dialogue on why the HSA is a better retirement vehicle than the 401K and IRA. Triple-tax advantages and strong investment options.

Rob Berger says:

Matt, thanks for the comment. It can take some time for your comment to appear as I need to approve each one (what with spam and all). The triple advantages of HSA’s are a great perk.

Chris says:

Rob, I think you get most of the salient points about HSA investing right but there is one option you miss. I’m a big fan of HSA investing btw. If Mike keeps all his receipts from this years out of pocket $5k plus any other payments he make over time, he can use these out of pocket expenses to offset any HSA withdrawals in the future. Thus he could take out $5k in HSA withdrawals post age 65 and offset that withdrawal with today’s $5K expense and thus not pay any taxes on the HSA withdrawal. It’s just one of many things that make HSAs so compelling.

Given Mike’s situation, I would advise to fully invest in the HSA in a broad market ETF like the Vanguard Total Stock Market (VTI) and keep contributing until 65. He’ll have a nest egg of several hundred thousand dollars that he can use to pay for supplemental Medicare insurance or even a long term health care policy, etc.

Rob Berger says:

Chris, thanks for the tip. That’s good to know.

HSA Guy says:

Rob –
Stats show you will use the HSA for medical expenses at some point. (220K-250K) for a couple today leaving the workforce.

I would advise a 401k play to the company match, then max the HSA and invest, then go back and fully fund your 401k and Roth.

The HSA is more flexible and you can use the account after 65 for what ever you wish (can be nonmedical at this point).

Rob Berger says:

That’s generally the approach I recommend as well. It’s critical to get the company match on the 401k or 403b first. After that, I do think it’s reasonable to go with either an IRA or an HSA, depending on a number of factors. It is worth keeping in mind, however, that while you can use an HSA for retirement savings, that’s not the intended purpose. You don’t want to short change your retirement savings, eventually spend the HSA money on health care, and then end up short on cash for your golden years.

Ryan Guina says:

Right now I am paying all my medical bills out of pocket and investing my HSA contributions in commission-free ETFs with TD Ameritrade. I understand the immediate tax benefits of using the HSA funds now, but I pay my medical expenses out of pocket now because I can afford to. This gives me the option of growing my HSA investments over the long run. I expect I will eventually need to tap into them for medical expenses (I’m 34, and who knows what will happen to me, my family, or the state of healthcare in the coming decades). But hopefully I will have a much larger nest egg in my HSA when that time comes.

I don’t necessarily call this an additional retirement account at this point. Between my savings and health insurance I should be able to cover most medical expenses, and continue letting the funds ride in my HSA. But it’s nice to be able to pull them if the need arises. So in a way, I look at it like an additional form of insurance with the benefit of potential long-term growth, and the potential to use it to supplement retirement income.

Either way, I’m happy I have access to the HSA plan. I think it’s one of the most under-utilized saving/investment opportunities out there. Glad you shed some light on it.

Rob Berger says:

Ryan, thanks for sharing your approach. The other nice thing about an HSA is that you can submit claims for medical expenses you incurred in past years. So even though you are paying out of pocket today, you can always decide to submit the claims down the road.

Jeff Briggs says:

Great piece on the HSA advantages; thanks! My situation mirrors that of many workers, I’m guessing — my HSA is through my employer, and the money is required to be placed in a bank account, which draws puny interest. My employer (state of Missouri government) also contributes a few hundred bucks a year to the account. So for me it’s a no brainer — pay medical bills with HSA money tax-free, and use my money for investing at a much higher return.

Wise Finish says:

You’re missing one big plus for HSA investing. Unlike 401(k) contributions, HSA contributions made from one’s paycheck are not subject to FICA (Social Security & Medicare) tax. That’s an extra 6% or so right at the start, making HSA the best thing to invest in after company matched accounts.