Health Savings Accounts (HSAs) stand out as one of the best tax-advantaged retirement accounts available, yet research indicates only 9.6% of Americans own one. For individuals already maximizing their 401(k) contributions, an HSA offers an excellent additional avenue for retirement savings.

According to Fidelity’s 2024 estimate, a 65-year-old individual may need an average of $165,000 in after-tax savings for healthcare expenses in retirement, a nearly 5% increase from 2023. This figure is, of course, influenced by personal factors such as retirement timing and location, health status, longevity, chosen savings accounts (e.g., 401(k), HSA, IRA, taxable), retirement tax rates, and even gross income.

While HSAs were initially designed to help manage the costs associated with high health insurance deductibles, they also provide substantial long-term savings potential. An HSA is a specialized, tax-advantaged savings account specifically created to complement high-deductible health plans (HDHP). This powerful financial tool enables you to save for healthcare costs while enjoying significant tax benefits.

HSAs offer dual flexibility: you can use the funds immediately for qualified medical expenses, or you can allow the money to grow over time as a long-term healthcare savings strategy. This adaptability makes HSAs valuable for both immediate healthcare needs and comprehensive future medical planning. Eligibility for HSA contributions is excluded for individuals with Medicare coverage or those whose health plans offer “first dollar coverage” (meaning the plan pays for services before deductibles or copayments are met).

What is an HSA? 

You can open an HSA through banks, credit unions, and other financial institutions. The money you contribute grows tax-free, as long as you use it for qualified, out-of-pocket medical expenses. These can include:

• Acupuncture
• Ambulance costs
• Doctor visits
• Hearing aids
• Prescription drugs
• Psychological therapy/psychiatric care
• Qualified long-term care services

You can often use these funds for similar medical costs for your spouse or dependents. Any money you don’t use rolls over to the next year, making HSAs a flexible savings tool.

Health Savings Accounts (HSAs) offer one of the most powerful tax-advantaged savings opportunities available, providing benefits at three distinct stages of the savings and spending cycle.

1. Tax-Free Contributions

Money contributed to your HSA reduces your taxable income dollar-for-dollar. When contributions are made through payroll deductions, they receive an additional benefit by avoiding Social Security and Medicare taxes (FICA), creating even greater tax savings.

2. Tax-Free Investment Earnings

Once funds are in your HSA, you can invest the money in various investment options. Any gains, dividends, or interest earned on these investments grow completely tax-free, allowing your healthcare savings to compound without tax drag over time.

3. Tax-Free Qualified Withdrawals

When you use HSA funds to pay for qualified medical expenses, those withdrawals are completely tax-free. This includes a wide range of healthcare costs, from routine doctor visits and prescriptions to major medical procedures.

Unmatched Tax Efficiency

This triple tax advantage makes HSAs uniquely powerful among all retirement and savings vehicles—no other account type offers tax benefits at contribution, growth, and withdrawal stages simultaneously.

But There is a Catch    

You can only open and contribute to an HSA if you’re enrolled in a high-deductible health plan (HDHP), as per IRS rules. More employers are now offering HDHPs; about a third of those with health benefits provide this option to their employees. These plans typically feature lower premiums but higher out-of-pocket costs or medical expenses, which your HSA can help cover.

“People often see the high deductible and get scared away, but it’s worth a conversation with your Financial Advisor about the financial benefits that the HSA can offer,” says Dana Erdfarb, Executive Director, HR Benefits Planning and Management at Morgan Stanley.

You need a “High Deductible Insurance Plan” in 2025 which means:   

• $1,650 Deductible (personal) 
• $3,300 Deductible (family)     

If you don’t need a low deductible, HSAs offer great tax advantages, help with future medical expenses, and can save you money on insurance premiums. Most people treat them like checking accounts:  

• Put money in 
• Pay medical bills 
• Repeat      

But the wealthy use a different strategy  

For those with substantial resources, the HSA serves as a powerful long-term investment tool. The strategy involves fully funding the HSA, covering immediate medical costs from other sources, meticulously saving all receipts, and investing the HSA balance. This enables tax-free growth and compounding, with the flexibility to reimburse themselves for past qualified medical expenses at any time.   

When you turn 65   

Your HSA turns into an IRA.    

So you can pull all your money out without any penalty. 

How to Set One Up 

Select your investment, such as Fidelity ZERO Total Market Index Fund $FZROX or something else

Choose a provider such as Fidelty Investments 

Complete an application 

Set up contributions 

Conclusion

Healthcare remains one of the most significant expenses in retirement. Your choices about when to retire, when to claim Social Security, and how you’ll generate income all impact how well you can cover these costs.

To help bridge any savings gaps for healthcare, consider increasing contributions to your tax-advantaged accounts. If you have access to an HSA, it’s an excellent option, as it allows for tax-free spending on healthcare expenses in retirement. Have questions about retirement planning? Reach out to Huckabee CPA for a free consultation.