How We’re Using Our Health Savings Account (HSA) In Early Retirement

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My initial introduction to the unique benefits of Health Savings Accounts (HSA) came a few years ago. The Mad Fientist published an article titled “HSA – The Ultimate Retirement Account”.

Health Savings Account

After reading his article I filed it away in the back of my mind. To use an HSA, you need to be covered by a high deductible health plan (HDHP). We were not eligible for an HSA during my full-time working years.

In December 2017, after leaving my job, my family switched to a HDHP through Kim’s employer. I revisited that article and decided to open an HSA for our family.

Since then, our situation has continued to evolve. As our situation has evolved, so has my strategy for using our HSA….

Positives of Health Savings Accounts

Let’s first review four key features of HSAs that make them so appealing:

Triple Tax Benefit of HSA

HSAs provide outstanding tax benefits compared to other tax-advantaged accounts that can typically be lumped into one of two categories:

  1. Tax deferred retirement accounts, such as a traditional IRA or 401(k) accounts, allow you to take a tax deduction in the year you contribute to the account. Your money grows without annual taxation of interest, dividends, or capital gains. You eventually pay tax at regular income tax rates when the money is withdrawn from the account.
  2. A Roth IRA or Roth variants of work sponsored retirement accounts require that you contribute after tax dollars to the account. Money then grows without any further taxation and withdrawals are tax free.

Related: When Are Roth Accounts Better Than Tax-Deferred

An HSA: 

  1. Provides the deduction of a tax-deferred account in the year you make a contribution. 
  2. Also allows you to take the money out without any taxation as with a Roth, as long as it is used for a qualified medical expense
  3. And you get the benefit investment growth without taxation of dividends, interest, or capital gains just as you would with any tax-advantaged retirement account.

Flexibility and Tax Free Growth

You don’t have to withdraw money from the HSA in the year that you incur a medical expense. As long as you are capable of covering your medical expenses out of pocket, you can save your receipts and leave your money in the HSA to grow tax free as long as you want.

You can then withdraw money to reimburse yourself later, after enjoying years or even decades of tax free investment growth. This is an interesting feature for those with adequate cash flow looking to optimize investment returns in your HSA.

Increase Deductible Medical Expenses

Qualified medical expenses are normally only deductible if they exceed 7.5% of your AGI. For example, if your AGI is $100,000 and you have $10,000 of medical expenses only $2,500 are deductible. And all of this is a moot point if you don’t have enough other deductions to make itemizing preferable to utilizing the standard deduction.

Using an HSA means you can get a deduction for your contribution, use the HSA as a pass through account, and take the money back out tax-free to pay for any qualified medical expense. Effectively, an HSA makes your first dollar of qualified medical expense deductible even if you are using the standard deduction.

Minimal Risk of Overcontributing

HSAs are different than other specialized tax advantaged savings accounts that come with tight restrictions and significant penalties if savings are not used as intended. These restrictions make use of these accounts risky if you are not certain you will need the full amount saved for the designated purpose.

For example, a Flexible Spending Account (FSA), which should not be confused with an HSA, can be useful to help pay for child care costs or medical costs with pre-tax dollars. But, if you set aside too much money in an FSA in a given year, you will generally have to forfeit your unused contribution.

Another example is using a 529 plan to save for your child’s college. If you don’t need the money for college and want to take it out of the account, your earnings will be subject to a 10% penalty in addition to any tax consequences. (Note: This tax risk of 529 plans is reduced with new legislation that allows unused 529 funds to be rolled over to a Roth IRA.)

The HSA comes without these penalties. In the worst case scenario, you over save in your HSA and are fortunate enough to reach age 65 without having needed to spend the money on healthcare costs.

This “worst case tax scenario,” is simultaneously the “best case personal scenario.” It means you had few qualified medical expenses, ie., you stayed healthy.

In this scenario, the triple tax benefit is reduced to an ordinary tax deferred retirement account. You withdraw your money to use for any purpose. Pay your taxes as you would with a traditional IRA, and face no penalties.

Evolving Strategy for Our HSA

Once we had access to an HSA, we immediately made it our priority to make the maximum family contribution each year. We have changed our investment strategy within the HSA.

Investing For Long-Term Growth

Initially, I invested our HSA dollars aggressively (consistent with our investment policy statement) with the intention of allowing the money to grow indefinitely while taking advantage of the triple tax benefit.

Over the past couple of years, our family incurred significant medical expenses. Because we were already in a low tax bracket in our semi-retirement years we wouldn’t have derived a great tax benefit from paying those expenses with our HSA dollars. 

Related: The Amazing Tax Benefits of Semi-Retirement

We continued paying our medical expenses with after-tax dollars and kept receipts of the expenses. We continued receiving a deduction for our HSA contribution and invested those HSA dollars.

HSA as an Emergency Fund

Earlier this year, Kim reduced her part-time work and no longer qualified for work sponsored health insurance for our family. We now purchase our insurance through

Knowing we may want to reimburse ourselves for past medical expenses in the not too distant future when it may be more advantageous, I began investing a portion of our dollars more conservatively.

Our Premium Tax Credit, and thus the amount of our health insurance premium we ultimately pay for our health insurance, is now determined by our taxable income. 

We continue to make maximum contributions to our HSA to get a deduction. This deduction is now more valuable because it lowers our taxable income in the year of the contribution. This in turn effectively lowers our cost of health insurance.

Related: Maximize ACA Subsidies and Minimize Health Insurance Costs

We now hold a substantial portion of our HSA in a high quality short-term bond fund which we are using as a portion of our emergency fund. Until we need this money, it will earn interest in a tax-sheltered account.

When we need money to meet spending needs, we can withdraw these dollars against our previously unreimbursed qualified medical expenses. Thus, the HSA can provide a tax-free source of early retirement dollars, available whenever we need them.

Are you using an HSA? What is your strategy for investing it and spending it down? Let’s discuss it in the comments below.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to Financial planning inquiries can be sent to]

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  1. Our HSA is still invested aggressively and intended to be used for long term health care needs. All receipts (including outrageously high cobra pmts) are saved so that funds can be withdrawn federally tax free. I maintain records of capital gains / dividend income though to report for CA. When withdrawn, HSA funds will be treated as though from a taxable brokerage acct.for CA tax purposes. .

  2. Even if you have “over-saved” on your HSA, 65 may not be the end of the road for the triple tax advantage as the HSA can be used to cover Medicare Part B, Part D and Medicare Advantage plan premiums, deductibles, copays and coinsurance.

    1. Can I reimburse Medicare premiums retroactively in the future – say I wait until I’m 80 and claim 15 years worth of part B premiums?

        1. S/V Sabbatical, Tim & Alan,

          I’m going to respond to all 3 of these comments in one, b/c they are all interrelated in my mind. There are two competing things to think about.

          Because of the triple tax advantage, you would ideally want to keep your dollars growing as long as possible which I think is the essence of what each of you is thinking. On that front, I agree.

          However, you don’t want to hold onto these dollars forever. If you die with money in a HSA it is the one scenario where HSA are not tax friendly compared to other accounts. HSA funds are taxable and must be fully distributed on the owner’s death, unless the beneficiary is a spouse. So you want to make sure that at some point you spend those dollars!

  3. We opened ours in 1997 when it was called an MSA. It was perfect for our small business. When we moved to semi and then full retirement, we kept the investments growing in stocks and mutual funds. We moved from an HSA eligible high-deductible plan thanks to the Premium Tax Credits, to a Silver Level Plan, with the Cost-Sharing Reductions, this has a $250 deductible, with a max out of pocket of $700 a year for my spouse. I’m covered via the Vets Admin.

    Our mix is now 70% Equities and 30% in CDs or T-bills. This may change when we start to pay Medicare Premiums and expenses out of the HSA. We’ve used HSA funds for Cancer Treatments, two Hip Replacements and various other medical, dental and vision expenses.

    I’ve been through a number of HSA Trustees over the past 26 years. I recall Golden Rule, HSABank and now Lively. Over the past Labor Day weekend the investments transitioned from TD to Schwab.

  4. Great article. I had no idea that there was no time limit about reimbursement. Such a great way to handle this when you want to max out your tax free growth.

    1. Suzanne,

      See my response above. You do ultimately want to make sure to spend these dollars.


  5. Great article! My wife and I have been maxing out and investing aggressively in our individual HSAs for the last 5 years. This year she switched to an insurance plan that isn’t HSA qualified and has a lower deductible, as we are expecting our first child soon. I still have my HDHP and maxed out my HSA for the individual amount of $3,850 this year. Fidelity still shows me I can contribute up to the family limit of $7,750 for this year.

    My question is, are there any rules against me contributing the family amount if my wife isn’t on my HDHP and she has her own lower deductible health plan? I haven’t been able to find any reputable information on this specific situation. Thanks!

  6. Another tax advantage of HSAs is that if your contributions take place via payroll deduction (as opposed to you sending money in directly to fund the account), it lowers your income subject to payroll taxes (over 7%!). I don’t think there is anything else that lowers income subject to both federal income tax AND payroll taxes. HSAs are awesome.

  7. I am 64 and after being laid off, am now in an HDHP for the first time in my life. Does it make sense to start an HSA with effectively only this year and next year to contribute before getting on to Medicare? (My assumption here is that once you are Medicare at 65, you are no longer able to contribute to an HSA.) Is the contribution prorated for partial years? What is the maximum single and family HSA contribution.

    1. Kevin,

      Whether it “makes sense” is a factor of your willingness to add a little hassle to open another account. I likely would do it even if just to get the deduction this year, put the money is safe investments where you can get around 5% risk-free growth while avoiding tax on those earnings, and then take the money back out to pay expenses within the next couple of years as you incur health care expenses without the hassle of keeping receipts and reimbursing yourself later. It seems like a pretty minimal amount of effort for likely a couple thousand dollars of benefit. Hope that helps.


  8. Another great article, Chris. Thanks. And the comments, too, are very helpful. I was unaware that portions of Medicare premiums could be paid/reimbursed with HSA money. We’ll definitely preserve some HSA money for that purpose. Although, it’ll be a few years before we reach age 65.

    Not mentioned in the article, HSA money can also be used to pay portions of Long Term Disability Insurance premiums. For us, that’s about 5% of our yearly budget.

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