October 28, 2021

Save More For Retirement With Your Health Savings Account

In Employer-Provided Benefits, Retirement, Wealth Strategy

Eric Schuehle
Contributions from: Eric Schuehle

As you plan for retirement, consider using one of the best options for building tax-advantaged savings – a Health Savings Account (HSA).  An HSA is a medical savings account available to anyone enrolled in an HSA compatible high-deductible health plan (HDHP).  For 2021 and 2022, the IRS defines a high deductible health plan as a plan with a deductible of at least $1,400 for an individual or $2,800 for a family.  Funds contributed to an HSA grow tax-free until withdrawn, and as long as the money is spent on qualified expenses, withdrawals are also tax free.  Since most people will face substantial medical expenses in their later years, an HSA is a great option for supplementing IRAs, 401ks, and other tax-advantaged retirement accounts.  Below are some frequently asked questions regarding this strategy.

How much can I contribute to my HSA?
For the 2022 calendar year, the contribution limit for individual HSAs has been increased from $3,600 per year to $3,650 per year and the contribution limit for a family has been increased from $7,200 per year to $7,300 per year.

If the HSA owner is 55 years of age or older, they can also make an additional $1,000 catch-up contribution into their HSA plan.

Note:  The maximum HSA contribution includes both employer + employee contributions.

How will an HSA affect my taxes?
HSA contributions are made on a pre-tax basis, whether by yourself, your employer, or someone else.  You can withdraw the money at any time, and distributions are also tax-free as long as you spend the money on qualified medical expenses incurred after the HSA was established.

Tax Treatment of Contributions & Distributions to HSA and IRA Accounts

What is a qualified withdrawal?
“Qualified” medical expenses include deductibles, fees, and other health care expenses on behalf of yourself, your spouse, and any dependents.  There is no time limit for claiming a reimbursement from your account, but you’ll need to document your expenses when you claim them.

Can I withdraw money to pay other expenses?
Nonqualified withdrawals are permitted at any time, but will be included in your taxable income.  If you are under 65, you will also pay a 20% tax penalty.  That penalty is waived if you are totally and permanently disabled or for withdrawals made after your death.

Can an HSA be used to pay insurance premiums?
Generally, no, funds from your HSA may not be used to pay insurance premiums.  However, there are a few exceptions where you can use your HSA to pay for the following:
– Long-term care insurance
– Health care continuation coverage (such as coverage under COBRA)
– Health care coverage while receiving unemployment compensation under federal or state law
– Once you reach age 65, you may use your fund, free of taxes and penalty, for qualified medical expenses as well as to pay for Medicare Parts A, B, D premiums, and Medicare HMO premiums.  However, premiums for a Medicare supplemental policy, such as Medigap, are not eligible expenses.

Do HSAs include fees?
Yes, and they vary from plan to plan.  We have found that Fidelity Investments offers a competitive HSA.  Some of the benefits the Fidelity HSA currently offers are:
– Opening Fee: There are no account opening fees or transfer fees.
– Minimum Balance: There is no minimum balance to open a Fidelity HSA.
– No monthly or annual maintenance fee and there is no minimum balance that must be held in cash.
– One integrated account; no transfers back and forth between different entities.  Other HSA plans generally require clients to open a separate brokerage account along with the cash that is being held with the HSA custodian.  Fidelity has consolidated these two accounts into one account.

Do HSAs come with investment options?
Many plans offer investment options.  At Fidelity, all of the investment options available in a regular Fidelity brokerage account are also available within their HSAs, including commission-free, low-cost index funds.

How can I use my HSA to save more for retirement?
Begin by fully funding your account each year.  Many people use HSA funds to cover current medical costs.  This provides an immediate tax savings.  However, if you can afford to pay current medical expenses out of pocket, your HSA balance will continue to grow, tax-free.  This effectively increases your retirement savings and your tax savings.

Does this strategy make sense for everyone?
For some people, paying current medical costs out of pocket may be challenging.  The deductible alone could be several thousand dollars, with fees and co-pays adding thousands more.  But for people who are young, healthy, or wealthy, this strategy is especially appealing.

– Young people have ample time for the HSA funds to grow over years, or even decades.
– Healthy people, with lower medical bills, will have more disposable income to contribute to their HSA.
– For wealthy people, with the ability to pay current medical costs and fully fund their retirement savings, an HSA provides the best option for accumulating tax-free funds.

Remember that no other retirement vehicle gives you tax advantages on both contributions and distributions.  However, if you do use your HSA to supplement your retirement funds, it’s important to invest in assets that will grow over time – similar to your IRA.  Using cash accounts or other low-return investments will diminish the HSA’s advantage.  If you have questions about HSAs, or if you are interested in how an HSA might fit in to your retirement strategy, your Coldstream advisor would be happy to discuss your options.

Supplemental Q&A

Do I need earned income in order to contribute to a HSA account?
No.  Contributions may be made by you, or on your behalf, even if you are retired, have no income, or your income is less than your contributions.

Are employer contributions to an HSA taxable income?
Generally, contributions made by an employer to the health savings account (HSA) of an eligible employee are excludable from an employee’s income and are not subject to federal income tax, Social Security, or Medicare taxes.

Can both spouses make a catch-up contribution?
If both spouses are eligible individuals and both spouses have established an HSA in their name and turn 55, then both can make catch-up contributions.  If only one spouse has an HSA in his or her name, only that spouse can make a catch-up contribution.

If I am turning 65 this year, can I still make an HSA contribution?
Once you enroll in Medicare, you may no longer contribute to your HSA.  You may be eligible to make a prorated contribution during the year you turn 65 before you enroll in Medicare.

Is there a deadline to make contributions to an HSA account?
Yes, yearly contributions should be made by your tax filing deadline, generally April 15th of the following year.

How does a spouse’s health coverage impact contribution limits?
If you have an HSA, but your spouse has separate health coverage, the following special rules may apply:
– If your spouse has an individual HSA-qualifying plan, then you would have to subtract your spouse’s contribution from the maximum that you could otherwise contribute.  In other words, although the IRS treats married couples as a single tax unit, if both spouses have self-only coverage, each spouse may only contribute up to $3,600 in 2021, or $3,650 in 2022, in separate accounts.
– If your spouse has non-qualifying family coverage that includes you, it makes you an “ineligible individual”, and you may not contribute to an HSA.

Can I transfer my IRA into an HSA?
Yes, the law allows a one-time transfer of IRA assets to fund an HSA.  The amount transferred may not exceed the amount of one year’s HSA contribution and individuals must be otherwise eligible to open an HSA.

Transfers are not taxable as IRA distributions.  On the other hand, amounts transferred into a HSA from an IRA cannot be deducted as a HSA contribution.  Recall that HSA contributions are deducted from your paycheck before taxes if you contribute to an HSA through your employer, or, if you make your own HSA contributions, you deduct it on the first page of your tax return.  IRA transfers are not eligible for this tax return deduction.

A few other key reminders:

  • As mentioned before, it can only occur once per lifetime.
  • The IRA and the HSA must be in the name of the same person.
  • Traditional and Roth IRAs are straight forward and allowed. SEP or Simple IRAs are a bit more complicated and not allowed by the IRS.
  • Most importantly, any transfer that takes place counts towards your annual HSA contribution limit (see 2021 & 2022 contribution limits above). This means that in the year that you do the transfer, plus the 12 months following the transfer, you must be eligible (i.e., covered by a high-deductible health plan) to contribute into an HSA.  It would make sense to wait until you have a good idea that you will be eligible for twelve full months to take full advantage of this one-time opportunity.  Remember that if you change jobs, retire, or for any other reason change health plans, you may not be eligible for the entire year.  Please note – waiting until you are 55 will allow you to take advantage of the extra $1,000 catch-up contribution, giving you more tax savings.

Are HSA funds portable?
The plans are portable, and can be rolled over year after year (no “use it or lose it”).  The IRS allows each HSA account holder to “roll over” their funds to a new HSA provider every 12 months and still maintain the tax-advantaged status of the HSA.  However, there is no limit on the number of trustee-to-trustee transfers (e.g., payments to doctors, pharmacies, etc.) you can make.

Can I use my HSA to pay for other elective procedures?
A partial list of items that you can include in figuring your medical expense deduction can be found IRS Pub 502.

Can I use the money in my HSA to pay for medical care for a family member?
Yes, you may withdraw funds to pay for the qualified medical expenses of yourself, your spouse, or a dependent without tax penalty.

What happens when I pass away?
There are 3 basic scenarios:

  • If your spouse is the beneficiary of your HSA, the account just becomes his/her HSA. (That is, it’s not an “inherited HSA.”  It’s just a normal HSA, now owned by your surviving spouse.)
  • If somebody other than your spouse is the beneficiary of your HSA, the account is no longer an HSA. It just becomes a regular taxable account, and the full value of the account is taxable as income to the beneficiary in the year of your death.*
  • If your estate is the beneficiary of your HSA, the account ceases to be an HSA, and the value of the account is included as income on your final tax return.

*If, within 1 year of the date of death, your non-spouse beneficiary (other than your estate) pays any of your qualified medical expenses that were incurred before your death, the amount of those expenses is subtracted from the amount that is taxable to the beneficiary.


Coldstream analyses are not intended to provide, and should not be construed to constitute, complete accounting, insurance, investment, legal, or tax advice.  None of the information provided constitutes a recommendation or solicitation of any particular custodian or account.  The investment strategies shown may not be suitable to you.  Coldstream does not provide any specific tax or legal advice; you should consult your tax, legal, or other advisors before implementing any changes to your current financial situation.

To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this communication (including attachments) is not intended or written to be used and cannot be used for (1) avoiding penalties imposed under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein unless the communication contains explicit language that it is a tax opinion in compliance with IRS requirements.  Please contact your tax advisor for guidance on your individual situation.

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