Is an HSA the Most Underrated Retirement Account? Here's What to Know.

If the first thing you thought upon learning your company offered only a high-deductible health plan (HDHP) was, "Well, nuts," there's some good news coming your way. HDHPs may have a higher deductible than traditional health plans, but they come with something no traditional health plan can offer: a Health Savings Account (HSA).

While an HSA is most commonly thought of as a way to pay medical expenses as they occur, it's much more than that. In fact, it may be one of the most underrated retirement-saving methods. Like traditional retirement savings plans -- 401(k)s and IRAs -- an HSA is built with the future in mind.

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Key features

Here are some key points associated with HSAs.

• Tax benefits: All contributions you make to your account are tax-deductible. In addition, the funds grow tax-free. Any withdrawals you make to pay for qualified medical expenses are also tax-free.
• Qualified expenses: There's a fairly extensive menu of qualified costs, including deductibles, copayments, and more.
• Portability: You own the account, so you can keep it even if you change health plans or move to another job.
• Rollover: Unlike a Flexible Spending Account (FSA), an HSA rolls over yearly without expiring.

It's that last bit, the part about HSAs' ability to roll over from year to year, that plays well into retirement plans.

Another tax-deductible way to save

Even if you're already contributing to a 401(k), IRA, or other retirement account, having an HDHP makes you eligible to save even more through an HSA. For 2025, you can contribute up to $4,150 if you cover yourself, and up to $8,300 if you have family HDHP coverage. And, if you're 55 or older during the tax year, you can make an annual catch-up contribution of $1,000.

For example, if you have individual health coverage and contribute the maximum of $4,150 to an HSA, your taxable income will be lowered by the same amount.

As a retirement account

Because an HSA can be rolled over yearly without expiring, you can utilize it as a retirement account. Imagine you're expecting a pension and contribute to a Roth IRA. You want to ensure you'll have more when you retire, so you make a plan for your HSA. Since you're still working, you'll pay most medical expenses out-of-pocket and invest the remaining $3,000 through the HSA provider. (Not all HSAs allow for investments, although most do.)

Let's say you begin investing your HSA funds at age 35, with plans to enroll in Medicare when you turn 65. If your investment earns an average annual return of 7%, your account balance will be over $283,000 by the time your Medicare card arrives. Better yet, there's no required minimum distribution (RMD) for HSAs, meaning the money can continue to grow as long as you'd like.

How the extra funds can help

You're free to use the money from your HSA any way you'd like although if you're under 65, you'll have to pay income tax plus a 20% penalty on withdrawals if the funds are used to pay for something other than qualified medical expenses. (After 65, the 20% penalty no longer applies.) Still, having options is nice. Here are several ways you can use your HSA if you'd like:

• Medical expenses: Including Medicare premiums, co-pays, deductibles, dental, and vision care.
• Long-term care services: These include nursing home fees and in-home care. Your HSA can even be used to pay the premiums for a tax-qualified long-term care insurance policy.
• Supplemental retirement income: Although you'll pay taxes (at your ordinary rate) on withdrawals, the money is available if you need a little extra to get by.

HSAs are nothing if not flexible. Use them today to cover your medical needs or save it for the future. The decision is up to you.

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