Many people view their health savings accounts (HSAs) as a tool to pay for health expenses. It certainly can be used for that, and while that may have been the original intention of their creators, many forget that the funds contributed can end up being used in the same way as retirement plan funds. Withdrawals taken after age 65 are not subject to penalty (in the way they would be if taken before age 65 and used for non-qualified expenses) and can be used at the account owner’s discretion.

The individual must be covered by a high-deductible plan. They can contribute up to the annual maximum limit of $4,300 in 2025 (plus an additional $1,000 if they are age 55 or older by the end of the year) to contribute to an HSA. Suppose the same individual’s family is also covered under the high deductible health plan. In that case, the contribution limit rises to $8,550 (plus an additional $1,000 if they are 55 or older by the end of the year). There are no income limits that apply to HSA contributions. Employers can contribute to an employee's HSA. Just be aware that those contributions count towards the aforementioned annual limit. Because most HSA contributions are made through payroll, they avoid FICA tax and are deductible for federal income tax purposes. Even those who make contributions outside of payroll can take a subsequent deduction for federal taxes when filing their return.

Some HSAs can invest funds. This option can turn the HSA into a pseudo-IRA, with tax-deferred growth and no future required minimum distribution required. A key distinction compared to an FSA is that the funds left in an HSA at the end of the year can be rolled forward and kept for future years. It’s not a use-it-or-lose-it situation, making them useful even if there are no qualified expenses in the years leading up to retirement and age 65.

If you retire before age 65, the funds in the HSA can be used to cover health insurance premiums before starting Medicare so long as the premium tax credit is not subsidizing those premiums. The distributions would be considered qualified and tax- and penalty-free, making this an excellent strategy.

If you work past age 65 and delay enrolling in Medicare, be weary of stopping your HSA contributions a full 6 months before applying for Medicare Part A or starting Social Security. When you begin to receive Social Security benefits, you are automatically enrolled in Medicare Part A, and coverage is back-dated for 6 months (but no earlier than the first month you would have been eligible for Medicare anyway (the month you turn 65)). You are not allowed to contribute to an HSA while enrolled in Medicare. Suppose you accidentally contribute or run afoul of this rule. In that case, you will need to remove the excess contribution before your tax filing due date and withdraw any investment earnings attributable to the excess contribution.

Another common question is who the funds can be used for. The account owner can pay for spousal medical expenses using the account. It can also be used for children or anyone dependent on the individual’s tax return.

If the owner of an HSA passes away, the account is transferred to the named beneficiary. If that beneficiary is a spouse, they become the account owner and can continue using it in the same manner as the original owner. Suppose the beneficiary was anyone other than the spouse. In that case, they must take a full distribution of the account, which results in taxable income and could push them into a higher tax bracket.

When planning for retirement, don’t forget about the HSA!

Ryan Naples is a financial planner for The Hucko Group.

Editor: Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM, Samuel P. Black III, Professor of Finance & Risk Management, Penn State Erie, mgf11@psu.edu