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I recently discovered that there is no lifetime limit to contributing to an HSA account - provided that you don't contribute more than the limit per year. Assuming that an individual makes a decent salary that covering their max-out-of-pocket for health insurance is not an issue, would it make sense to save and delay using HSA money until retirement when income is more limited? Are there pros and cons from a tax perspective?

  • Huh? HSAs don't pay interest or dividends, unlike IRAs, 401Ks, etc. So, are you assuming you first max out those? – smci Apr 27 '17 at 14:21
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    @smci, I don't recall ever seeing an HSA that doesn't have an investing component to it. Do you have an example of one? I'd be curious to see it. – Wesley Marshall Apr 27 '17 at 16:29
  • @WesleyMarshall: that's what I'm saying: they don't, so what's the rationale of this question? That HSAs make medical expenses tax-free, as opposed to tax-deferred retirement savings? The rationale only makes sense if you're close enough to retirement that the tax-free savings exceeds the foregone interest/dividends. It won't make sense if you're under 40, for sure. – smci Apr 27 '17 at 16:33
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    @smci, I think you misread my comment. Can you provide a link to an account of this type that does not allow you to invest the money? Because I can provide links to several that offer mutual funds. – Wesley Marshall Apr 27 '17 at 16:49
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    @smci Some HSAs do not offer investing options, perhaps only paying a small amount of interest, similar to a savings account. Other HSAs, however, allow you to invest your money in mutual funds, just as you would in an IRA. This question is about investable HSA accounts. – Ben Miller Apr 28 '17 at 17:25
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Yes, absolutely.

The HSA, when used for medical expenses, allows you to essentially pay for your medical expenses tax free. Even if you don't have extra room in your budget, you can fund the HSA as you incur medical expenses, then withdraw money to pay the expenses, and you'll see an immediate tax benefit at tax time.

However, let's say that you have plenty of room in your budget and you don't have a lot of medical expenses. You already contribute the maximum to your 401(k) or IRA, and you want to do more. The HSA acts like a retirement account in this case, allowing you to contribute before-tax money and let it grow untaxed.

The HSA does have a huge benefit that no other retirement account has. If you choose not to reimburse yourself for medical expenses, but you keep track of the unreimbursed expenses you incur, then you can reimburse yourself for these expenses at any point in the future completely tax free. Essentially, your contributions are treated like a traditional IRA, but your withdrawals are treated like a Roth IRA, and can be done at any age. If you don't acquire enough medical expenses, you can still withdraw whatever is left at age 65 and those withdrawals will be taxed like a traditional IRA.

The HSA provides for tax-free contributions and growth if used for medical expenses, and tax-deferred growth if withdrawn after age 65 without medical expenses.

  • Assuming you do not max your IRA, isn't it "better" to withdraw from your HSA as expenses occur and deposit it into a Roth IRA? None of the answers so far mention this common case. – VBCPP Apr 26 '17 at 23:15
  • @VBCPP Yes, if you aren't already maxing out your IRA contributions, you certainly can take your reimbursed medical expense money and put it in your Roth IRA. However, there is a trade-off there. The pro to the Roth is that your earnings can be withdrawn tax- and penalty-free for any reason at age 59.5 (5.5 years earlier than the HSA). However, with the HSA, you might be able to withdraw some of your earnings even earlier, if you accumulate more medical expenses. – Ben Miller Apr 26 '17 at 23:53
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Is it worth saving HSA funds until retirement?

Yes

Are there pros and cons from a tax perspective?

Mostly pros.

This has all of the benefits of an IRA, but if you use it for medical expenses then you get to use the money tax free on the other side. Retirement seems to be the time you are most likely to need money for medical expenses. So why wouldn't you want to start saving tax free to cover those expenses?

The cons are similar to other tax advantaged retirement accounts. If you withdraw before retirement time for non-medical purposes, you will pay penalties, but if you withdraw at retirement time, you will pay the same taxes you would pay on an IRA.


I should note that I put my money where my mouth is and I max out my contribution to my HSA every year.

  • What would happen to the money if you die? Does your estate withdraw it at the regular tax rate? – krillgar Apr 26 '17 at 17:55
  • Beneficiary spouse uses it like any HSA. Otherwise it's more complicated worthy of an entirely new question. – Nathan L Apr 26 '17 at 17:59
  • It passes to a named beneficiary, if that beneficiary is a spouse it's their HSA, if it's not a spouse it is cashed out at fair market value and treated as taxable income to the beneficiary. – Hart CO Apr 26 '17 at 18:08
  • Your answer is good and succinct, but you overlook a large benefit, in that you can defer reimbursement for medical expenses. Pay out of pocket now, get it reimbursed in 20 years, which offers significant tax-free growth potential. – Hart CO Apr 26 '17 at 18:11
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If you can afford to max out an HSA and cover out of pocket expenses without withdrawing from it, it makes sense to do so.

It might sound initially risky to tie too much money to healthcare expenses, perhaps you'll enjoy exceptional health and not need those funds. However, the annual contribution limit ($3,350/year for an individual) is low enough that it's unlikely you'd overfund your HSA, but even if you didn't need it all for healthcare, after 65 you can withdraw HSA funds without the 20% withdrawal penalty that you're hit with if under 65, so best case it's tax-free, worst-case it's like an IRA.

From a tax perspective, your contributions are a tax-deduction like a traditional IRA, there's no tax on the gains, and you withdraw it tax-free as well, so long as you have healthcare expenses.

The tricky bit is you can get reimbursed for your expenses at any time. If you pay out of pocket now, in 20 years you can get a reimbursement from your HSA:

From HSA Bank's FAQ

Can I use my tax-free HSA savings to pay for — or reimburse myself for — IRS-qualified medical expenses from a previous year? Yes, as long as the IRS-qualified medical expenses were incurred after your HSA was established, you can pay them or reimburse yourself with HSA funds at any time. Just be sure to keep sufficient records to show that these expenses were not previously paid for by another source or taken as an itemized deduction in any prior tax year.

  • I'm wondering if one does a rollover of a prior HSA into a new one, if the date of the HRA being established is the original date or is reset to the new date. In other words, does rolling over invalidate reimbursing expenses that occurred before the rollover? – Taylor Edmiston Apr 26 '17 at 23:20
  • @TaylorEdmiston Good question, I'm not certain. I know HSA's are portable, so I wouldn't think moving them around has any affect, but probably best to check with individual HSA administrators on that. – Hart CO Apr 26 '17 at 23:49
  • @TaylorEdmiston - the law allows you to have more than one HSA account. Therefore, the only date that matters is the date in which the first account was established, with the caveat being that from that first day on at least one HSA account was always open since. – TTT Aug 3 '17 at 20:26
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There are some points not covered in the other answers that I feel are important to address:

  1. Eligibility to contribute to an HSA

In order to be eligible to contribute to an HSA, you must be enrolled in a High Deductible Health insurance Plan (HDHP). In general, I think this is a great idea for most people (who are responsible enough to save up for medical expenses), but for a small portion it may cost more money to enroll in this type of plan, due to high recurring medical costs. You should always weigh the costs of the related insurance plans against the benefit of an HSA.

Note that once you open an account and contribute, you can use the funds at any point after that. The eligibility described here is only regarding making new contributions to the account.

  1. Administrative costs

This may no longer be true, but when I first started using an HSA several years back, I noticed that the fees and costs administered by the providers were higher than I’d come to expect from, say, my IRA administrator. At least, this was true for the accounts I found – perhaps I missed a better option.

Furthermore, there was a much smaller selection of investment options available in those HSAs than in other brokerage accounts. If you are not maxing out retirement already, it’s worth comparing fees and historical returns versus those accounts rather than assuming that the tax benefits will make the HSA a better deal.

In my book, if it passes these two checks, then the HSA is a tremendous deal that is highly under-utilized.

  • One additional thing that seems less significant, but still noteworthy. I have also seen a stipulation on some accounts that a certain amount in the account be held in cash reserves, rather than invested. I think it is typically a few hundred dollars, but YMMV. – Wesley Marshall Apr 27 '17 at 18:34

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