A Closer Look at Using a Health Savings Account (HSA) to Save for Retirement

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

After reading his article I filed it away in the back of my mind. I didn’t have access to an HSA while working.

Fortunately, I had highly subsidized medical insurance with a low deductible. To use an HSA, you need to be covered by a high deductible health plan (HDHP).

Still, I felt I was missing out on the benefits of the “ultimate” tax advantaged saving account that could shorten my path to early retirement.

This December, my family switched to an HDHP. I revisited that original article and considered whether an HSA was right for us.

As I went through this process, I found that HSAs do have amazing tax benefits. However, utilizing the HSA to your maximal advantage is not as easy as I first assumed. Let’s look at the positives and negatives to help determine if an HSA is right for you.

Positives of Health Savings Accounts

Let’s first recap the Mad Fientist’s article. There are three key benefits that caused him to dub the HSA the “Ultimate Retirement Account”.

Triple Tax Advantage

The first  advantage of an HSA is the outstanding tax benefit it offers compared to designated retirement accounts that can typically be lumped into one of two categories.

Tax deferred retirement accounts, such as a traditional IRA or 401(k) account, 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 You eventually pay tax at regular income tax rates when the money is withdrawn from the account.

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.

An HSA allows for the deduction of a tax deferred account in the year you make a contribution. You may also take the money out without any taxation as with a Roth, as long as it is used for a qualified health expense. And you get the benefit of year over year investment growth without taxation of dividends, interest, or capital gains just as you would with any retirement account.

Minimal Risk

HSAs are different than other specialized tax advantaged savings accounts that come with tight restrictions and serious 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 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.

The HSA comes without these risks. 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.

In this case, 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.

Flexibility and Tax Free Growth

Another interesting point is that you don’t have to withdraw money from the HSA in the year that you incur a medical expense.

As long as you have money to cover 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 reimburse yourself later, after enjoying years or even decades of tax free investment growth.

This is an interesting feature for those looking to optimize investment returns in your HSA. 

Negatives of Health Savings Accounts

Health Savings Accounts have excellent features that make them appealing to use as tax advantaged savings accounts to supplement other retirement savings. However, they are not without flaws. Let’s examine a few.

Small Contribution Limits

The annual contribution limit for an HSA in 2018 is only $3,450 for an individual and $6,900 for a family with coverage under a high deductible health plan. Compare this to 401(k) plans with individual contribution limits of $18,500 in 2018.

This means a working individual or couple looking to max out tax advantaged savings could save less than 20% in an HSA compared to what they could save in their 401(k) accounts. 

Any additional options for tax advantaged saving and investing are good. But the small contribution limits mean generally small balances in HSAs. According to Forbes, the average HSA balance is only $9,000. They also report that only 11% of HSAs hold investments other than cash.

This all leads to the next problem with HSAs…

Poor Investment Options

Investing an HSA sounds great in theory. The internet and the index investing boom has made being a DIY investor easier than ever.

Vanguard has driven down investment fees throughout the industry. Others like Schwab and Fidelity have responded, further lowering fees for investors in most arenas.

HSAs are one exception. There are too few people investing too little money for the big boys to compete over HSA accounts. Most HSAs are layered with onerous fees.

This leaves only a few reasonable low cost options to invest an HSA. We’ll look at the best options for investing an HSA in a future post.

Logistical Issues

The idea of allowing your money to grow for long periods of time with the triple tax advantages may sound appealing at first glance. In reality, accumulating a meaningful investment balance would be challenging.

It would likely take a decade of maxing out accounts every year, while not spending any of your contributions on qualifying expenses, and investing aggressively to build a six figure HSA balance.

You need the sustained good luck of not needing to pay any medical expenses. Or, you could pay the medical costs out of pocket, then have to wait to be reimbursed years later after the accounts have grown. This is a valid and legal strategy. But, it involves meticulous record keeping and organization.

For me, simplicity has more value than saving a few dollars, so I would take distributions annually to pay for costs incurred during the year. This means that I want a portion of my HSA in non-volatile assets. This leads to one more challenge of HSAs…

Horrible Interest Rates

Interest rates on HSA accounts are generally lower than you could get at any number of local or online banks. Some are better than others, but there is another problematic trend.

HSAs with the best interest rates tend to be local banks that have poor investing options, or no option to invest at all. HSA providers with the best investment options tend to have horrible interest rates on savings accounts.

My Final Verdict on Using an HSA

Being a personal finance nerd, I was excited to have the opportunity to sign up for an HSA. With a better understanding of practical issues associated with HSAs, I am less bullish.

I ultimately decided that an HSA made sense for our family, so we enrolled in December. We were able to make the maximal contribution for 2017, $6,750. This allowed us to reduce our 2017 tax bill by $1687.50. We were in the 25% marginal tax bracket as a two income family and prior to recent tax rate reductions.

Future contributions will offer less valuable deductions due to our lower retirement income and lower tax rates starting in 2018. We will reevaluate ongoing contributions.

Examine your own situation to see if you are eligible for a health savings account. Then decide if the tax benefits make sense for your personal investing goals.

Next month, we’ll look at the best options for investing an HSA and share how we plan to utilize this tool.

[Contributing Editor 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. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris' writing has been featured in MarketWatch, Doughroller, Business Insider and RockStar Finance. He is also the primary author of the forthcoming book Choose FI: Your Blueprint to Financial Independence. You can reach him at]

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  1. I love having an HSA at the moment but certainly agree with the downsides. I am lucky to have ours in an account that allows for investing (not just a “savings account”), but we have to keep some money in cash reaping a pitiful interest rate each month. Overall, it is still a good option for us 🙂

    • Chris Mamula says

      Agree that it can be a useful tool. Just not quite as great in practicality as it is in theory.

  2. Another advantage of an HSA is if you contribute to your HSA through a payroll deduction you don’t pay FICA.

    • Chris Mamula says


      You make a really good point that eliminating FICA is a great feature for those that contribute through payroll deduction.

      This adds a whole additional layer of complexity. The nice thing about an HSA compared to other retirement accounts is that you are not stuck with the provider your employee chooses. You can open an HSA on your own, without the employer. Another downside though is that if you choose to go out on your own and choose a provider, you lose the FICA tax benefit, unless you have an employer willing to deal with that level of hassle of doing payroll contributions to a number of different HSA providers.

      It is a choice that only a few readers will have to deal with, so I left it out of the article. But it can be very important for those that do have this option. I’m glad you brought it up so people can discuss in the comments.

      It would be nice if all of this was simpler, but I would have less to write about. 🙂

      • Norman W Bunn says

        My wife’s employer uses a local bank to hold the HSA proceeds. Once it gets up in size, we do a partial transfer to another custodian (trustee to trustee transfer) which has a relationship with a broker. While it takes some periodic maintenance, this does allow us to put some of the money to work for the long term.

  3. We’ve been making maximum family contributions to an HSA for several years now. While the contribution limits are not large, we’re playing the long game. We don’t plan to touch that money until retirement and we’ll likely try to stay out of it until 65 when we can use it to pay our Medicare premiums. You summed up the disadvantages nicely regarding investment options. You have to read a lot of fine print to understand the fees your account will be subjected to in return for investment options beyond piddly interest rates. So far the fees we’re paying are tolerable, but I sure wish Vanguard would get into the game.

    • Chris Mamula says

      There are a few decent options which I will discuss in a separate post, but agree that it would be nice if enough people were investing in HSA accounts to get the Vanguards interested in competing for them.

      • LiveLoveLaugh says

        I have enrolled in HSA for several years. I periodically rollover the fund from employer’s HSA administrator to HSA Bank. They allow to invest with TD Ameritrade. It’s been pretty good so far.

  4. Our employer-sponsored plan automatically adds all copays and other out of pocket expenses, and stores them for whenever we would like to withdraw against them. We still save all receipts ourselves, to be double covered.

    One other note is that at age 50+ the maximum annual contribution increases a bit, just as for IRAs.

    • Chris Mamula says


      That is a nice feature provided by your employer. Thanks for sharing the info about the increased contributions, as I hadn’t caught that before. I just double checked and you are correct that you can contribute an extra $1000, but that is for those age 55+.

      • Most people do not realize that, for those age 55+ and on a family plan, you can actually contribute an extra $2000 ($1000 for the primary and $1000 for the spouse). However, the caveat is that you have to open a separate HSA account to deposit the spouse’s $1000. If you are depositing the base $6500 yourself, you can divide it between both accounts to build the balance up enough to avoid minimum limit fees.

        Also, regarding using your HSA funds in retirement, you can use your HSA to pay for Medicare parts A, B, D and Medicare HMO premiums tax-free and penalty-free. You cannot use your HSA to pay for Medigap insurance premiums.

      • Chris;
        Another benefit with certain employer sponsored plans is when they seed the account as a way to encourage higher participation rates. My employer funded $1000 of the $7750 that I can contribute this year for my family plan, an increase from last year’s $800 (yes, I’m over 55 and still working…) – so like an employer match, it’s free money… I’ve maxed out the last 2 years and invested in 2 vanguard funds – the investments are made automatically as my payroll contributions are received. And like Ginger reported above, they integrate with my health plan to capture all my medical/dental/drug store receipts auto-magically…my husband and I are generally healthy and just pay our co-pays and other costs out of pocket and consider this to be a major medical policy. Luckily, we haven’t had any major medical matters. The overall fees aren’t great (the HSA has a 3bps/mo fee on total assets but the free money from my employer, plus the tax reduction obtained from the deferral more than cover that cost thus far.

        • Chris Mamula says

          Agree that there is almost never a good reason that I can think of to pass up free money. Like with a bad 401(k) even if fees are high, you can always roll it over later. With HSA, you may actually be able to transfer the money while working, but you would obviously want to be careful to not step away from an employer match or lose payroll deductions if you get those.

  5. This article couldn’t have been more timely as I just finished my 2017 taxes and realized I could have used an HSA deduction if only I had opened the account by 12/1/2017. I was going to start looking into HSAs today for 2018. I look forward to your upcoming article on HSA investment options. And thanks for everything you’ve written.

  6. I opened an HSA years ago for my husband and I. My name was the primary, even though everything was joint. It grew to about 60k.

    Then my husband’s employer offered an HSA with matching contributions. Different provider, but this one had him listed as primary even though it was family account. It had ~6k. Next year when he left, the monthly fees (~$20) were no longer paid by the company.

    You cannot combine HSA’s if the primary name is different. Beware!

    The fees would have wiped out the account relatively quickly. Luckily I had been saving un-reimbursed receipts for years and withdrew the entire amount before we even got hit with the 1st monthly fee.

    I love the HSAs but you need to be on top of the rules to maximize gains.

    • Chris Mamula says

      True, you need to be aware of the rules and fees associated with HSA’s. You can transfer an HSA to a different provider, similar to rolling over a 401(k). I’ll be reviewing the best places to invest an HSA in an upcoming post.

      • My current employer investment choices are lousy, with higher than normal fees just like you said in the article. But given it’s common to switch employers every few years in my industry, I plan to roll-over my HSA to my preferred brokerage firms when I change jobs to get better options. HSA is a nice little extra above the max 401-k contributions and is better than after-tax investing so I’m all in to the max allowed. Take what you can get.

      • That’s the delicate point here:
        A family *cannot* transfer an HSA to a different provider if one spouse filled out the paperwork the first time, and the other spouse filled out the paperwork the second time.

        Even though it is Family Coverage (a.k.a. a 50/50 joint account that both are signers on), it belongs to the person whose name is *primary* on the account.

    • I can see where having different names as primary on the accounts messed things up for you, however if the names are the same then you can roll over from one HSA to another just like a 401K. I had a simailar experience where I left an employer, and I still had the HSA with the employer. Just like you said all of a sudden there were huge monthly fees! (And possible low balance fees). Rolling it over fixes that. However what happens when I retire – am I just stuck with the fees?

  7. You cannot do an HSA if on Medicare. Plus I thought I’d read somewhere that you cannot pay your Medicare premiums through an HSA.

    • Chris Mamula says


      You are correct that you can not pay insurance premiums with an HSA, but my understanding is that you can get the “triple tax benefit” of an HSA if using the withdrawals to pay for medical expenses even when covered by Medicare. I am not a tax professional and this is only my understanding of the law.

  8. Lynda Young says

    Saving in HSA over years may be a good strategy but remember if you have Medicare you can no longer save in an HSA only take reimbursements. Therefore if you have employer health insurance many people at 65, enroll in Medicare part A but you can’t contribute to an HSA. Perhaps not having the double coverage of hospitalization (part A) is worth delaying ALL Medicare coverage until employer group coverage ends.

  9. Robert Reynolds says

    There is a very good HSA option from whose founders had bad experiences with other HSAs so they decided to establish a better HSA for everyone. They offer a full TDAmeritrade option and are highly ranked by third party review sites. I switched to them after I retired and have been very pleased with their customer support. If you just want a cash account there is no fee, otherwise it is $2.50 per month for the TDAmeritrade option that gives you access to boost your interest through a CD ladder, for example.

    • Chris Mamula says

      You’re stealing my thunder Robert 😉 That was my choice also as I’ll write about in a couple of weeks.

      There are a couple of reasonable options as well that I’ll share.

      • I researched it heavily back in early 2000’s and found Optum Bank to be fantastic for waived fees and no load (or waived load) investing. I have all Vanguard funds (above the $2k min. threshold).

        Chris, I hope that you compare OptumBank along with

  10. I think you missed the point of the HSA, it is not a substitute for the 401k so just because the contribution limit is small does not mean you forgo it, it is a supplement to the 401k. Also it does not take “meticulous record keeping” you through your medical receipts into a box and when you need the money pull them out and take a deduction for it, it can’t get much more simple than that, just as easy or easier than a 529, the 529 comes with so many exceptions. Yes investment are limited but many 401K plans also have very limited investment options. And I am not sure why you would have to reevaluate the HSA next year just because you dropped to a 15% tax bracket, you save 15% now and the you save 15% one your profits, there is nowhere else that can match that deal. If you have extra money to invest then the HSA is a great option.

    • Chris Mamula says

      The negative about the small contribution limit is that not many providers want to compete to offer good investing options. I do agree that 401(k) plans can also have bad options, but you can roll those over when you leave an employer to the brokerage of your choice. There just aren’t many great options for investing an HSA.

      Regarding the record keeping, I agree it is pretty simple for the year, and we plan to submit to our HSA once annually to be reimbursed. However, over the period of many years, there is potential to lose receipts, lose track of what was reimbursed and what not, one spouse who keeps records getting sick, dying, etc. You can feel free to disagree. I personally will opt for simplicity and submit receipts annually rather than deal with it.

      The part of your comment that I most agree with is that it is highly likely that we will make a contribution next year. This is because we have such a small balance, that we’re almost guaranteed of needing to spend the money on health care expenses at some point when we can take the funds tax free. Where this is not obvious is for those that may have to take the money as a distribution and pay taxes at ordinary income rates. Our anticipated marginal rate of 12% is pretty low due to tax cuts and our decreased income, and paying taxes later could be a losing proposition.

  11. The way I look at it, it is $7900 I would not have been able to invest in a tax advantaged account otherwise. If it turns out that I need the money for medical expenses, it’s tax free. If I can hold off until 65, it’s even more flexible. Also, as I’m technically self-employed (partner at a law firm), those contributions are not only income tax free, but also self-employment tax free (which saves an extra 15%). All in all, very little down side.

    • Chris Mamula says

      In your case, agree that it sounds like a no-brainer from a tax perspective, as it would have been for us if still earning high salaries and able to make contributions via payroll and avoid even more tax. Not quite as sweet of a deal now with low income and lower tax rates.

  12. This may sound like a foolish question, but can retired people contribute to this? Thanks.

    • Chris Mamula says

      You can if you are covered by a high deductible health plan. You can not if covered by Medicare.

  13. Getting FIREd Up says

    After we signed up for a high deductible health plan, I was surprised to learn that you can’t have a Flexible Spending Acct (FSA) for healthcare and an HSA! You have to be really careful to be sure your qualify for an HSA if you work for an employer who offers health insurance options to you or your spouse. There are very specific rules that can disqualify you from participating even after you think you’re on the right track.

  14. 1. use Optum bank via UHC for many years. Very happy having a 10% return since inception. Selected three funds and monthly rebalance and any time balance is over $2,200 it goes to investments.
    2. Been putting away the max for over 55 which was $7,900. Can you do the extra $1,000 for wife using a separate HSA even when she doesn’t work? We file as a couple. (Thank for this hack). Will check with
    3. Didn’t know until recently that I can hold back all receipts for a long as I don’t need the cash. This is a fantastic way to have a unintended cash reserve!!!
    4. I have been using the medical expenses to rack up rewards points with credit card offers and just getting reimbursed to pay the medical expenses. No issues so far. I do keep the medical receipts.

    Great article and greater comments!

    • Chris Mamula says

      1. One of my complaints with most of the HSA providers with decent investment options is a requirement to keep a cash balance in accounts with poor interest rates. That creates a big drag for someone looking to invest and having only a small balance to work with.
      2. Definitely interested in what you learn. My understanding is that over 55 you can contribute an extra $1,000.
      3. Glad I could help!
      4. I love that idea. Since not working, we’re having a hard time hitting minimal spends to get CC reward points. This may be a great way to manufacture spending, though currently our med expenses are also very low as well.

  15. Another approach is to use HSA as merely a conduit to pay out of pocket medical costs with untaxed money.

    Because it works in combination with high deductible plans, you’ll likely to have enough bills to make it worthwhile. It’s essentially a 22 or 25% discount on whatever you pay out of pocket

    • Chris Mamula says

      Yes Yyz. This is exactly what most people do. As noted in the article only 11% of people hold anything except cash in their HSAs. This makes it pretty much a no brainer for anyone in a high marginal tax rate and with any medical expenses to pay for them at a steep discount, simply using the HSA as a pass through account. What I’m talking about is making the decision of whether to use an HSA as an investment vehicle.

  16. Mary Sherwin says

    Some other thoughts on HSAs. Your contributions are adjustments against whatever taxable income you have, it does not have to be W-2 or self-employment income. Any Individual (parents/kids/friends, etc…) can make contributions to your HSA on your behalf and you can adjust your taxable income by that amount in addition to your own contributions. You have until the federal tax filing deadline to make an HSA contribution. If you are trying to get below the threshold for subsidization of your Marketplace healthcare premiums, the HSA contribution reduces your modified adjusted gross income whereas a Roth contribution does not. If you are buying insurance via the Marketplace and want to use an HSA, make sure the High Deductible Health Plan is HSA eligible. There are high deductible plans with a deductible limit greater than the maximum deductible limit permitted for HSA eligible HDHPs. This article and comments/discussion are excellent.

    • Chris Mamula says

      Thanks for sharing your insights Mary. Agree that I’m learning as much in the comments as I did in my original research to write the article.

    • Out of pocket maximum cannot be higher than $13,300 for a family in 2018 in order for it to qualify for HSA. As Mary indicated, some of the out of pocket maximums on the marketplace plans are higher than $13,300 (family in 2018).

  17. Are distributions from an HSA that are used to pay MEDICAL EXPENSES incurred while on Medicare tax-free distributions or are they taxed as ordinary income?

  18. On the issue of keeping medical receipts, most of us now have digital records (often photos) that we back up extensively, ideally up to the cloud and via a local “1-2-3” strategy for backup. I have a folder for scanned medical expense receipts, so I never have to worry about losing a shoebox of receipts or paper receipts fading over the years. The IRS will accept a scanned copy of receipts as long as they are identical to the originals and contain all of the accurate information that are included in the original receipts. I also enter them into a small spreadsheet that is included in this folder so that in the future I can rapidly select items for reimbursement based on amount, date, etc. and know the total “owed” to me by the account.

    • Chris Mamula says


      I hate the idea of adding complexity to my finances, but your comment and those of others has me questioning if my wife and I need to sit down and have a conversation to come up with a system to do this. Thanks for sharing your ideas. A little extra effort could add up to big savings over time.

    • I don’t find it any more onerous than other kinds of record keeping. I’m surprised that nobody has mentioned a couple other things: we save about $400/month in premiums by having an HDHP. So we reduced our taxable income by $8,750 for 2017 using savings in premiums for a nice chunk of that. Despite the low interest rates and a moderate monthly administration fee, I consider the tax savings to be our ROI, because we don’t intend to ever use the dollars for anything but medical expenses. I am retired and 4 years from Medicare; my husband is working part time in retirement and has 6 years to bridge to Medicare. Once we have 4 years of maximum annual out-of-pocket expenses sitting in the HSA (1 more years), we’ll re-evaluate. We pay all medical expenses out of pocket now, and save receipts. Because I have had some medical issues in the past, this is all insurance against those popping up and screwing up our early retirement–essentially this is an extra emergency cash fund with a dedicated purpose. If all goes to plan, we’ll both enter our Medicare-covered years with enough to pay our medicare premiums and any out-of-pocket expenses for a long, long time–and might just reimburse expenses from years past if we want a little cash–all with money that was never taxed. If we have issues pre-Medicare, we have a few years of max out-of-pocket expenses covered before we would have to make any change in our retirement financial plan and budget.


    Can I name our HSA provider here, and you tell me if we’re paying high fees that I don’t know about? I don’t want to make an accidental endorsement nor steal our host’s thuntder. Ask me privately, via email, and he can write it up.

    With the provider we’ve used since 2005, every penny goes into a decent range of Vanguard Index funds, mostly in the Admiral class. With a combined balance over $78,000, it’s hard for me to find real drawbacks. I guess worst case, now that we’re on Medicare, would be that we never get sick enough to use the funds, and pass the balance on with our estate. “Never get sick enough” is hardly a drawback.

    Other than that, we see no downside. An annual fee of about $35 per account. Plus small percentages, token amounts, that are taken out for asset managing. I haven’t vetted any “true cost” of these.

    But with the 25% tax discount on all contributions going in, it’s pretty close to a no-brainer for us. Let me know if the provider’s name is welcome here.

    (($; -)}™

    • Chris Mamula says

      Sure you can share. Others have already.

      • The company where we have our pair of HSAs is: Health Savings Administrators (a hard name to remember!):


        We opened these accounts in 2005, and this was about the best at the time. I have not researched others since then, as I have no complaints.

        These HSAa are great vehicles that provide (A) the upfront deductions of a traditional retirement account, (B) the deferral of all retirement accounts, and (C) the tax-free withdrawals of a Roth IRA/401(k).

        The ACA website reports on whether any particular plan qualifies as “HSA compatible.” Not much, in terms of investments

        (($; -)}™

        • “The ACA website reports on whether any particular plan qualifies as “HSA compatible.” Not much, in terms of investments” I got interrupted, and don’t remember what the end of this sentence was to be.


        • Chris Mamula says

          Agree they sounded good and they will be in my review.

  20. I signed up for an HSA about 5 years ago because 1. it was the cheapest option my company offered because no premium co-pay from me, 2. I was able to keep my same unrestricted network of doctors, 3. I could use the money to pay private insurance premiums in the event I got laid off, and 4. it’s a great emergency fund if you get hit with an unexpected big medical expense when your other savings are slim. I briefly looked at the investment options but passed because the complexity and risk of loss was too great given I was only a few years away from Medicare eligibility when contributing to an HSA ceases to be allowed.

    • Chris Mamula says


      I was probably not as clear as I could have been in my post about my conflicts with the HSA. I think for almost anyone that is eligible, has the money to contribute, and is in a high tax bracket an HSA is pretty much a no brainer as a pass through account to get a deduction when contributing and then having tax free money to use for medical expenses. The issue is whether it is worth the hassle to try to invest the HSA or just toss it into savings. Your summed that up well. Thanks!

  21. Just to clarify – I enrolled in an HDHP during Open Enrollment season (Nov/Dec 2017) to take advantage of the HSA in 2018. Does this mean I can contribute to my HSA for 2017 as well, even though I had other insurance during that time? If so, that would be great!

    • Chris Mamula says


      My family just went on my wife’s HDHP on Dec 1, 2017. We were able to make the full contribution in 2017 which was beneficial to us. The caveat is that we need to stay on an HDHP plan through Nov 30, 2018 or face penalties. If you did not open your HSA yet, I’m not sure if you can still make the full contribution towards 2017. That would be a good question for an accountant.

  22. RetiredAt49 says

    The only other thing I haven’t seen mentioned is the fact that once you are retired and your income is lower, you have the option of doing Roth Conversions at very very low tax rates. Contributing to an HSA increases your capacity for Roth conversions dollar for dollar! It’s a very cool thing when tax saving tricks compound!

    My contributions to Health Savings Administrators are now substantial enough that I have no worries about having a high deductible plan. Their fees are just $45 a year and I have a TON of Vanguard funds to choose from at the low low Vanguard costs. HSAs are a huge boon for the early retired. And there’s nothing meticulous about the receipt saving…just stick those receipts in a file folder and forget it. (I need to move the file folder to the fire safe though…I may need to shift to a scan and back up solution.)

    I feel like your article may have done a disservice to the HSA concept. Luckily the comments are setting the record straight.

    • Chris Mamula says


      I’m going to have to respectfully disagree that I did a disservice to HSAs. As noted, I did sign up for one. All I am saying is that 1.) to use an HSA as an investment vehicle presents some challenges that people need to be aware of and 2.) I am in a position of already being in a low marginal tax rate where the tax advantages are not as great so I will re-evaluate annually. That said, you are not the only commenter to express that opinion and I am happy to allow dissenting opinions in the comments and have a robust conversation as you can see. Thanks for chiming in and sharing your $.02.

  23. I loved your HSA article, but there is one thing I have been unable to wrap my head around, so I’m looking for a little help/direction/clarification. The pretax dollars that are contributed to an HSA reduce your reported Social Security and Medicare earnings by their corresponding amount. Since your SS benefits in retirement are based on your earnings over the years, doesn’t that reduce your potential earnings/benefits received in retirement? Perhaps I am overthinking this or am missing/misunderstanding something. Those are all possible, and I’m certainly hoping to be educated in this area. Thanks so much!

    • Chris Mamula says

      Unless you can contribute by payroll deduction, you will still pay SS taxes. You get a federal deduction and in PA we get a state deduction (not 100% certain that is true in all states). If you could also eliminate SS taxes and corresponding benefits, I would gladly do it. This makes the assumption that you will invest and not spend the savings and you are confident you can do better with your money than the government. You need to judge if those are good assumptions. Hope that helps.

  24. Steve Harvey says

    You can even make a one-time HSA trustee-to-trustee transfer (up to your annual contribution limit PLUS catch-up amount) from your Traditional IRA into your HSA without paying taxes on it. The IRS calls this a “funding distribution”. This might be considered equivalent to a ‘free’ conversion of those funds from a Traditional IRA to a Roth IRA without the 5-year holding period the Roth conversion requires. It’s a great way to get some funds into your HSA right away. This is a one-time benefit so you should probably wait until you can do the full amount. You’ll of course want to do this from your TRADITIONAL IRA…not your ROTH IRA which already has the tax benefits built in.

    Don’t forget to use your ability to make a funding distribution from your IRA as soon as you can. Whether making an IRA “rollover” or a before-tax outside contribution, as you approach Medicare eligibility (or becoming ineligible for an HSA for other reasons…like dropping your HDHP in the future) the timing of the actual date you make your contribution becomes important. You must remain eligible to contribute to an HSA for a full 12 months AFTER the actual contribution date (not year). Check out the Rule about the Testing Period for your Funding Distribution in IRS Publication 969 for a detailed explanation.

    • Chris Mamula says

      Thanks for sharing Steve. That could be a strategy that makes sense for some people to get tax free benefits from an IRA, particularly if they couldn’t otherwise fund and HSA in a given year.

  25. I continue to be frustrated at blog posts related to this topic because they all fail to cover the highest risk topic — actually having a major healthcare event(s) in your family. I would like to see someone run the financials of the benefit of the lower HDHP premiums and HSA account versus having to incur the maximum out-of-pocket cost due to a healthcare event. I was a big believer in the HDHP’s until both of my kids had multiple hospital stays over the course of 6 months straddling 2 calendar years. My $20,000 HSA account disappeared due to all of the out-of-pocket costs. You can praise all of the tax benefits you want, but if you’re unlucky enough to have a major healthcare issue, your HSA will be wiped out VERY quickly with an HDHP plan. The risk of HSA’s need to be viewed in the same light as a big downturn in the market. However, there’s no strategy to “wait-out” a downturn in your health. It can come up unexpectedly to you or one of your family members and completely negate any retirement tax benefits an HSA may provide.

    • Rich,
      I tried to look at the cost difference between the traditional PPO option (higher premium, lower deductible, lower max out of pocket) vs the HDHP w/ HSA option because we were having our first child. Unfortunately, all the prenatal care with in 2017 and the birth in 2018, so I am not sure how it will be accounted in regard to the out of pocket limit. I was also confused how things fall into each bucket. You pay 100% until you hit the deductible, then you pay a co-insurance % for the rest of the bill. Is the deductible good for only one event? And what determines what is a singular event or something incurred over multiple days, doc visits, procedures, etc.

      I ended up just going with the HDHP w/ HSA for both years because the lower premiums and the employer contribution of $1300 seemed to offset the cost difference in premiums and amount of out of pocket max. Whether that turns out to truly be the case, I’m not sure I’ll ever know.

      • Chris Mamula says


        Agree that the terminology is extremely confusing. These are definitely questions you should ask to specific providers before deciding on a plan, as all are different. Having worked in the health care industry on the provider side, it certainly feels like insurance companies make up and change the rules at their will.

    • Chris Mamula says


      I’m not sure how regularly you read, but I have covered the challenges of health care in several posts and I have shared that one of my big motivators for seeking early retirement was the passing of my cousin after losing a battle with cancer a few years ago. However, risk management for a “major healthcare event” is not the ONLY planning issue. You also have to look at upside scenarios, and that is what we’re discussing here. It’s apples and oranges.

      Also would have to disagree that a downturn in your health would “completely negate any retirement tax benefits an HSA may provide”. You still get the triple tax benefit of using pre-tax dollars to contribute, get tax free growth (even if only a little interest on a savings account and only for a few months) and you take it out tax free. This is like getting a discount on your health care costs equivalent to your marginal tax rate + any state tax benefit you may receive. These savings can be applied to your retirement savings or just generally allow you to maintain your wealth. And this is really what an HSA was meant to do.

      I do understand your frustration with the costs of the US medical system and the complexity that comes with the insurance and HSAs on top of it. However, it is important to understand that all insurance is a bet that the insurance company will always win in aggregate, at least if they are solvent. We as individuals sometimes will lose (we hope), and sometimes we win (by having an adverse event that the insurance company has to pay). Knowing that is the case, I tend to try to buy as little insurance as possible, and use insurance to protect against massive losses I can’t afford to take (medical, liability, home). This is why for our generally healthy family using a high deductible plan made sense when it became an option and an HSA further shifts the odds in our favor of this being a winning bet. Hope that helps.

  26. I love having HSA despite the downsides. It is better than having none. Besides, it is a great addition to retirement fund especially if I’ll need it for healthcare expenses. It would be a great addition also to Medicare and Medigap plan that I will have. Therefore, it is still a good choice to have. 🙂

    • Chris Mamula says

      At the end of the day I agree as shared in the article. Just not as great as I initially thought.

  27. This is a brilliant doc that lets you compare HDHP vs. LDHP

    Spoiler alert – HSA is almost always better, even in the event of a medical emergency