Nov 5, 2024
Health savings accounts were created in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act. Those with qualifying high-deductible health plans can make deductible contributions to HSAs, with the goal of providing a pot of tax-free funds to cover out-of-pocket medical expenses.
HSAs come with annual contribution limits, which vary by year and depend on whether you have an individual or family plan. In 2025, for example, those with a qualifying individual plan will be able to contribute up to $4,300 while those with a family plan are allowed to invest up to $8,550.
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This money doesn’t have to be spent right away. You can invest and allow it to grow over time. If you’ve done that consistently since 2003, you’d have tens of thousands in your account now, depending on how your investments performed.
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But that leaves you with a big question: how should you spend all that money as a retiree? Here’s what you need to know to figure that out.
You can withdraw HSA money tax-free for any reason after turning 65
The first thing to know is that you’re allowed to withdraw money penalty-free from your HSA for any reason after 65. Before that time, if you withdraw money other than for qualifying medical expenses, you’d face a 20% penalty.
This rule provides flexibility to use your HSA funds for anything you need in retirement. However, there’s a big catch. HSAs allow tax-free withdrawals, but only if you’re using the money for qualifying expenses related to health care.
If you’re using HSA money for other expenses, you’ll be taxed at your ordinary income tax rate. Essentially, this will mean the account works like a 401(k). Your money was contributed with pre-tax funds, it grew tax-free, but you’re taxed on it as a senior.
This isn’t the worst outcome since you already got a tax break. However, you lose one of the biggest advantages HSAs offer — the ability to both make tax-free contributions and take tax-free withdrawals if the money is used for medical care.
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Aim to use your HSA for qualifying expenses
If you want to make the most of the tax breaks HSAs offer, aim to use the money for a qualifying medical expense.
Obviously, this means that you can use it to pay for things like doctor visits, prescription medications, or hospital visits. You can also use it for other health-related expenses, including dental care and vision coverage, which traditional Medicare doesn’t pay for.
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The good news is, the definition of eligible expense is actually broader than you’d expect so you have more opportunities than you’d think to be able to take tax-free withdrawals. For example, you can use HSAs to pay premiums for Medicare Part B, Medicare Part D, or Medicare Advantage plans. Since most people have these premiums paid out of their Social Security checks, you can withdraw your HSA funds to reimburse yourself.
If you’re purchasing long-term care insurance, you can also pay for a portion of the premiums with HSA money. And, if you paid for health care expenses out of pocket in the past but didn’t use HSA funds despite having an active HSA, you can reimburse yourself for those expenses with a withdrawal from the account, as long as you kept records and receipts, according to Lively, an HSA provider.
Whenever possible, try to use your HSA money for these expenses — or for any others the IRS identifies as eligible. You can find a complete list in Publication 969 or visit sites like the HSA Store where you can buy qualifying products.
This way, you don’t have to pay taxes on money you take out, which means your money will go a whole lot further as a retiree.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
