How an HSA Can Benefit You: A Comprehensive Guide

If you haven’t felt the pinch of medical expenses yet, you likely will one day if you don’t plan for them, especially in retirement.

Health care costs have been rising faster than overall inflation for years. Medicare isn’t free and covers less than many people think. A couple will need at least $351,000 to have a good chance of covering just their medical expenses in retirement, according to an  industry survey. 

Is there a magic bullet? No. But there is a way to help you manage health care costs before and during retirement. It’s called a health care savings account. An HSA also can be a strategic and effective supplement to retirement income in general. Just remember that an HSA would be supplemental income and should never be used to replace a pretax savings account, like a 401(k), in a retirement strategy.

What is an HSA and what are its powers?

What’s an HSA?

An HSA is a savings account is primarily designed to pay for only medical expenses.

You can only open and make contributions to an HSA when you enroll in a high-deductible health plan for health insurance. There are other requirements as well as benefits, which we will get to.

HDHPs can have lower premiums, but they may have high deductibles, so they can require a lot of out-of-pocket payments before those deductibles are reached. The funds in an HSA can be used to cover the costs that an HDHP initially won’t.

What are an HSA’s primary benefits?

You can enroll in an HSA through your employer or on your own. What makes HSAs powerful is that they don’t have one, or two tax advantages but three.  

• You can make pretax contributions pretax through payroll deductions.
• You don’t have to pay taxes on money withdrawn provided you use the money for qualified medical expenses. 
• Your savings can grow tax free within an HSA.

The last point means you don’t have to pay taxes on any investment gains. Usually, the HSA provider offers investment options such as mutual funds, exchange-traded funds or other securities for you to invest the HSA money. Remember, the account’s distributions need to be used for qualified medical expenses for the investment gains to be tax free.

Another key benefit: You can keep your HSA for your entire life. Your contributions will be in the account until you withdraw them.

If you opened an HSA at your job, the account remains yours even after you leave your job. Your contributions can potentially add up big over time, especially if they’re invested in a diversified portfolio. 

Keep in mind too, that during your work years, an HSA can be part of an overall tax strategy as contributing pretax to an HSA can lower your taxable income.

HSA contribution limits vs an FSA’s

There is an annual contribution limits to HSAs released each year by the IRS. The 2025 contribution limits are $4,300 per individual and $8,550 per family (and an additional $1,000 for those contributing aged 55 and over). 

Between its tax advantages and its ability to let funds the opportunity to grow long term, HSAs can add up if you contribute each year and can create a nice nest egg for your health care costs. 

Don’t confuse an HSA with a flexible spending account, which is designed to help pay for health care costs but generally only in the plan year. At the end of your annual insurance coverage, you usually lose unused money in the FSA.  Some FSAs allow carryover amounts set by the IRS, which was $660 in 2025. An FSA also has annual contribution limits, which for 2025 is $3,300 for individuals and $6,600 for couples.

While you can’t contribute to an FSA and an HSA in the same year, an HSA can benefit you quite well on its own, especially over the long term.

How you can and can’t use HSAs 

An HSA doesn’t pay for expenses that people may believe to be medical. For example, an HSA can’t be used for marijuana-derived therapies and most cosmetic surgeries, but physician-subscribed acupuncture and weight-loss programs can be. 

The IRS defined qualified medical expenses as diagnosis, cure, mitigation, treatment, or prevention of disease, which covers anything from physician (including mental health) visits to medically necessary surgeries. Bottom line: An HSA should help cover expenses from those unexpected and costly health care crises.

You can’t use your HSA to cover for health care insurance premiums. But can use it for health care continuation coverage (such as COBRA) and health care coverage when you’re unemployed. 

What happens if you don’t use your HSA for qualified medical expenses?

If you don’t use your HSA for qualified medical expenses, then the withdrawals will need to be included within your taxable income in the year of the distribution and will be subject to an additional 20% tax. 

When you take a distribution from your HSA, you will receive a 1099-SA form your HSA provider. Work with your tax professional to  use that information to fill out Form 8889 and file that form with your federal tax return. If you used any of the distribution for non-qualified expenses, then you need to report that too on the Form 8889 and pay the associated taxes.

Do you need to include the receipts with your tax return? No, but you should get and keep all receipts in case the IRS does request them if you were to be audited by them. 

How can you qualify for an HSA contributions?

HSAs aren’t for everyone. One reason is having an HDHP as a health insurance plan doesn’t make sense for plenty of people. There are also a number of other requirements for contributing to an HSA:

• You can’t be enrolled in Medicare (you can enroll after you reach 65, with some exceptions)
• You can’t be enrolled in a health plan through your spouse that is not a HDHP
• You can’t be enrolled in a flexible spending account (though you can be enrolled in a limited FSA)
• You can’t be claimed as a dependent on someone else’s tax return

Help Maximize HSA benefits 

How can you benefit from HSA in retirement if being enrolled in Medicare prevents you from having one? Easy. You can withdraw from your HSA after you’re enrolled in Medicare, but you can’t contribute to one. If you’ve been squirreling away money into an HSA over time, you could have a sizable amount to help supplement your Medicare coverage. In fact, you can use it to pay for the Medicare premiums themselves as well as long-term care insurance.

Also, once you reach age 65, you can use your HSA for non-medical expenses without having to pay the additional 20% penalty. While you would have to pay income taxes on the distribution, your HSA could end up supplementing your retirement income in general. 

Again, remember that an HSA should never be used to replace a pretax savings account, like a 401(k), as part of a retirement strategy. Ultimately, its function would be supplemental income to help pay for health care costs.

To help build your HSA account, you want to consider lower cost investment options. Investment fees take away from returns. Mutual funds or exchange-traded funds that track the performance of widely known indexes can have lower fees. Your investment options will depend on your HSA provider, and that brings us  to the process of enrolling in an HSA.

How do you enroll in an HSA?

If you receive your HDHP insurance through an employer, try to get an HSA through your employer. Typically, you can open an HSA through your employer during your benefits enrollment period. 

A number of employers offer to contribute to their employees’ HSAs, which is an incentive for getting an HSA through your workplace.

That said, if you’re self-employed and/or get an HSA-eligible HDHP plan through the federal government’s Health Insurance Marketplace, you also can open an HSA on your own. One way is to contact your health insurance provider to see if they partner with an HSA provider. Also research HSA providers online. 

Next steps

While an HSA has its benefits, having one may not be right for you due to its requirements. 

A financial planner can answer your additional questions about HSAs and help determine if one makes sense for you. A financial planner can work with you and your insurance provider  to help you through the enrollment process and find ways to use an HSA to not only help strengthen your health care resources but your financial future, in general.