Opinion: Your HSA can be an extra retirement savings — how to make smart choices during open enrollment

If you participate in a qualifying high-deductible health plan (HDHP), you may be eligible for a Health Savings Account (HSA), which allows you to save, invest and pay for healthcare expenses. For 2023, plans with a deductible of at least $1,500 for an individual or $3,000 for a family are considered HDHPs by the IRS. HSAs can be a great addition to workers’ financial tool kits, yet less than half of all employees (48%) who are offered an HSA by their employer are using it, according to data from SchwabRetirement Plan Services. To make the most of an HSA, consider these important characteristics and strategies.

Funds roll over

Unlike a flexible savings account, which has a “use it or lose it” policy, unused HSA funds remain in your account year after year and transfer when you change employers.

Strategy: Use an HSA as a long-term savings vehicle for future medical costs and even other retirement expenses.

This works particularly well for workers who only have small copays and prescriptions to take care of now. If your out-of-pocket healthcare expenses are minimal and you’re able to, consider paying them on your own while letting the funds in your HSA grow tax-free. That way, you can prepare to cover potential additional services or treatments, expected or unexpected, that may raise your healthcare costs down the road, even in retirement.

Triple tax benefit

HSA contributors can reap tax benefits in three ways. First, contributions are tax-deductible, reducing your taxable income. Second, contributions and earnings grow tax-free, and third, withdrawals for qualified medical expenses are tax-free.

Strategy: If you have the means, consider funding your HSA up to the limit to maximize the tax benefits. The 2023 contribution limit is $3,850 for individuals and $7,750 for families.

Contributors also have the opportunity to invest funds. Most younger workers (58% of Generation Z and 56% of millennials) are investing at least part of their HSA in mutual funds or other types of investments other than cash, compared to 38% of Generation X and 30% of boomers, Schwab data show. My colleagues at the Schwab Center for Financial Research generally suggest keeping two to three years’ worth of routine medical expenses in cash, cash investments, or similar low-volatility investments and investing the remaining balance for potential growth.

Withdrawal flexibility after 65

There is no tax on HSA withdrawals for medical expenses no matter your age, but if you withdraw for nonmedical expenses before age 65, you face income tax plus a 20% penalty. After age 65 though, HSA withdrawals for nonmedical expenses are taxed as ordinary income, just like your withdrawals from a traditional 401(k) or IRA. And you can use the money for anything you want.

Strategy: Consider your HSA as supplementary retirement savings.

In addition to the tax parallels with traditional retirement accounts, HSAs don’t have a required minimum distribution (RMD), which is the minimum annual amount you must withdraw from traditional 401(k)s or IRAs after age 70 ½ or age 72 for those who turn 70 after July 1, 2019. HSA users cannot continue contributing once they’ve enrolled in Medicare or if they are not covered by an HDHP, but they have an abundance of flexibility to use existing HSA funds in or near retirement.

It’s important for everyone to understand and leverage tax-advantaged accounts to help maximize their savings. Start by contributing to an employer-sponsored retirement plan like a 401(k), especially to get any matching dollars from your company. If you can afford to put aside more, consider how contributing to an HSA might fit into your overall financial goals. And remember, if you have questions, contact your 401(k) or HSA provider.  

Catherine Golladay is Managing Director and Head of Schwab Workplace Financial Services.

The information contained herein is proprietary to Schwab Retirement Plan Services Inc. (SRPS) and is for informational purposes only. None of the information constitutes a recommendation by SRPS. The information is not intended to provide tax, legal, or investment advice; please consult with your accountant or investment adviser for how this applies to your specific situation. SRPS does not guarantee the suitability or potential value of any particular investment or information source. Certain information provided herein may be subject to change. None of the information contained herein may be copied, assigned, transferred, disclosed, or utilized without the express written approval of SRPS and its affiliates.

Workplace Financial Services is a business enterprise which offers products and services through Schwab Retirement Plan Services, Inc.; Schwab Stock Plan Services; and Compliance Solutions. Schwab Retirement Plan Services, Inc., provides record-keeping and related services with respect to retirement plans. Schwab Stock Plan Services is a division of Charles Schwab & Co., Inc. providing equity compensation plan services and brokerage solutions for corporate clients. Compliance Solutions is comprised of Schwab Designated Brokerage Services (DBS), a division of Charles Schwab & Co., Inc. DBS provides brokerage solutions for corporate clients who monitor their employees’ securities activity. Schwab Retirement Plan Services, Inc. and Charles Schwab & Co., Inc. (Member SIPC, www.sipc.org) are separate but affiliated entities, and each is a subsidiary of The Charles Schwab Corporation. 1122-2BWL