According to Healthcare.gov, the definition of an HSA is “A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.”1
When it comes to retirement planning and paying for health care costs, everybody is unique, but we’ll go through the how an HSA works, the pros and cons of an HSA, and how you can use an HSA for retirement planning, to help decide if an HSA is right for you.
What is a Health Savings Account (HSA)?
A health savings account (HSA) is an account to help you save for health care expenses either now or in retirement. Health care expenses that an HSA can be used for are medical, prescriptions, dental, hearing, and vision. An HSA can also provide potential tax benefits, which we’ll get into later. Since a health savings account reduces the need to use your personal savings for health care costs in retirement, you can give yourself confidence in how you’ll help pay for future medical expenses.
How does an HSA work?
To use an HSA, you must be enrolled in a high-deductible health plan (HDHP). Once you’re in the HDHP you can either open the HSA on your own or through your employer, if offered. An HSA allows employees to contribute part of their earnings directly into their HSA, pre-taxed during their working years before they turn 65. For 2022, the contribution limit is $3,650 for an individual with self-coverage and $7,300 for an individual with family coverage.2
What are HSA pros and cons?
When deciding whether to use an HSA, there are a few advantages and potential disadvantages to be aware of to help you make the decision if utilizing an HSA is right for you.
The benefits of Health Savings Accounts
- HSAs offer three types of possible tax benefits.
- Pre-tax contributions – the money you put into an HSA is funded with pretax employer and employee contributions, which lowers the current year taxes by reducing taxable income
- Tax-free growth – investments held in the HSA can grow on a tax-deferred basis
- Tax-free distribution – distributions for qualified health care expenses are tax free*
- Potentially use it as a retirement savings vehicle.
- No required minimum distributions
- Able to transfer the account to a spouse or beneficiary upon death
- The account stays with you when you leave a job – it’s not a “use-it-or-lose-it” account.
The cons of Health Savings Accounts
- It can be hard to predict how much future medical expenses will cost, which makes it difficult to know how much to budget for your HSA.
- The pressure to save money for retirement expenses and grow your HSA account could lead to you not seeking out the appropriate health care now when you need it.3
- If you withdraw from the HSA for a nonqualified health care expense, the withdrawal is subject to taxation plus a 20% penalty.
How can you utilize your HSA for retirement planning?
Many Americans are worried about how they are going to pay for their health care costs in retirement. According to Nationwide’s Health Care and Long-Term Care Consumer Survey, 80% of Americans cannot accurately estimate how much they expect to pay for health care in retirement.4 As we mentioned above, since health savings accounts offer potential tax benefits, they are a great way to pay for current health care expenses but also save for expenses that will arise in retirement. If you can afford to put extra money aside now, you are allowing your funds to potentially grow and be worth more when you are ready for retirement.
Should you get an HSA?
While only you can decide if an HSA is right for you, it’s important to think through the potential benefits and disadvantages that come with an HSA account. If you still have questions or additional concerns about utilizing an HSA account, a financial professional can help you learn more and provide more guidance.
For more information on health care cost planning, view our resources that you can discuss with your designated financial professional.
 “Health Care and Long-Term Care Consumer Survey,” conducted by Harris Poll on behalf of the Nationwide Retirement Institute (2018). The fourth annual survey was conducted online within the United States from Feb. 5 though 22, 2018, among 1,007 adults ages 50 and older who have a household income of $150,000 or more (“affluent adults”), and 522 adults ages 50 and older who are or have been caregivers.
*HSAs are not taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states, but not all, recognize HSA funds as tax-free.
Investment available to HSA holders are subject to risk, include the possible loss of the principal invested.
Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.