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HSA Part 2 – Utilizing as a Retirement Planning Tool

June 26, 2019

Wondering what a Health Savings Account (HSA) is? Please see my previous blog post from early June. In this post we’ll focus on how best to utilize an HSA.


To get the most out of an HSA, it’s important to plan and invest the funds within your HSA purposefully. The best use of an HSA is for those who have extra cash flow to contribute and can invest the money for many years, in a way using the HSA as a retirement planning vehicle. To be able to use this strategy you need to be in a financial position that you can pay your normal healthcare expenses (premiums, co – pays, deductibles, prescriptions, etc.) out of pocket. It’s key to consider the impact of contributing to an HSA on your other goals. An HSA is a fantastic tool when properly implemented in your overall financial plan but might not be the best option if it’s coming at the expense of you establishing an emergency fund, funding retirement accounts, or saving for a child’s education for instance.


If the use of an HSA makes sense in your situation, consider the effect compounding can have on these assets over 20, 30, or more years. If you were able to contribute the current annual maximum contribution of $7,000 per year for a family for only five years at 8% interest, your HSA would grow to $281,240.92 in year 30. That’s a $35,000 total investment on your part growing to $281,240.92. Please note, I’ve used 8% for illustrative purposes and your rate of return will depend on the performance of the underlying investment you use in the HSA. The money in the HSA grows tax free the entire time it’s invested, the contribution is pre – tax or tax deductible, and the money comes out tax free for qualified medical expenses. If the money is not used for a qualified medical expense, it can be withdrawn after age 65 and you will pay normal income taxes only on the gain. If you withdraw money from an HSA prior to age 65 for a non – qualified medical expense, you may be subject to both normal income tax and a penalty on the withdrawn amount.


Remember to keep receipts for medical expenses you pay out of pocket as you can reimburse yourself years down the road from an HSA if it was a qualified medical expense.


An HSA is not for everybody but can be a powerful tool for some when positioned properly as part of your overall financial planning picture.