Health Savings Accounts (HSAs): Tax Benefits, Contribution Limits, and Retirement Planning Strategies

These plans are associated with high-deductible health plans (HDHPs), which allow eligible individuals to contribute to a Health Savings Account (HSA). Let’s examine how HSAs work and the benefits they can offer, particularly as part of a long-term retirement strategy.

What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged medical savings account available to eligible individuals enrolled in qualifying health plans, including HDHPs. In 2027, qualifying HDHPs must have minimum annual deductibles of $1,750 for individual coverage and $3,500 for family coverage, with maximum out-of-pocket expenses of $8,700 and $17,400, respectively. Eligible individuals may contribute up to $4,500 annually for individual coverage or $9,000 for family coverage. If you are age 55 or older, you may make an additional catch-up contribution of $1,000 per year.²

For spouses or domestic partners covered under a family HDHP, each individual age 55 or older is eligible to make a $1,000 catch-up contribution. However, catch-up contributions must be made to the HSA owned by the individual making the contribution. For example, if Spouse A and Spouse B are both age 55 or older and covered under family coverage, Spouse A may make a catch-up contribution to their own HSA, but Spouse B must establish and contribute to an HSA in their own name to make their catch-up contribution.

Key HSA Tax Benefits

HSAs are often described as “triple tax-advantaged” because they offer tax benefits when contributions are made, while assets remain invested, and when funds are used for qualified medical expenses. In addition, HSAs offer several features that can make them a valuable retirement planning tool, including the following:

• Contributions may be tax-deductible or made with pre-tax dollars.
• Earnings, interest, and investment gains can grow tax-free.
• Qualified withdrawals for medical expenses are tax-free.
• Unused funds remain in the account and can continue to accumulate from year to year.
• Assets remain yours to keep, even if you change employers or retire.
• The account can be invested for long-term growth, depending on the provider and available investment options.
• There are no required minimum distributions, and accumulated funds can continue to be used throughout retirement. However, contributions must stop once you enroll in Medicare.
• Accumulated assets can be used to help cover healthcare expenses in retirement, including certain Medicare premiums.

If you are considering opening an HSA, it’s important to evaluate the available providers and account features. Compare their monthly account fees and transaction costs and determine whether or not they offer investment options. Some providers offer low-cost investment choices through mutual funds as well as an FDIC-insured cash component. Depending on the provider, you may be able to invest some or all of your HSA balance, although certain accounts require a minimum cash balance.

Using an HSA as a Long-Term Retirement Planning Tool

Healthcare costs can represent a significant expense throughout retirement, making an HSA a valuable tool for building tax-advantaged assets that can help support future healthcare needs and certain Medicare premiums.

Another important benefit of an HSA is its ability to cover certain Medicare premiums. HSA funds can generally be withdrawn tax-free to pay Medicare Part B and Part D premiums, as well as Medicare Advantage premiums and Part A premiums when applicable. However, Medicare supplemental insurance (Medigap) premiums are not considered qualified HSA expenses.

Beginning at age 65, HSA funds may also be withdrawn for nonmedical purposes without incurring the 20% additional tax that generally applies to earlier non-qualified withdrawals. However, these distributions remain subject to ordinary income tax. An HSA can be an effective way to pay current medical expenses using tax-advantaged dollars. For individuals who are able to cover healthcare costs from cash flow, however, an HSA may also serve as a valuable long-term savings vehicle. Over time, invested HSA assets can accumulate and help fund healthcare expenses throughout retirement.

The greatest value of an HSA often comes not from the tax benefits alone, but from how it can be integrated into a broader financial strategy. If you are eligible to contribute, your Modera advisor can help you assess how an HSA may complement your investment, tax, and retirement planning objectives.