It’s no secret that healthcare will likely be one of your larger expenses once your career ends and your retirement plan kicks in. Fidelity puts the price of healthcare in retirement at $165,000 for the average 65-year-old in 2024; the average cost of healthcare by age starts climbing from about age 55.
Not surprisingly, many people worry about paying for future healthcare needs. In a recent Nationwide survey, 64% of Americans said they’re terrified of what healthcare costs might do to their retirement plans.
That’s why it’s crucial to read up on healthcare costs ahead of retirement and plan and save for them. And you could go about that in a number of ways.
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Of course, one option is to boost your cash savings ahead of retirement so you can cover healthcare bills as they arise. Another is to pad your IRA or 401(k).
But there’s another account it pays to maximize if you’re worried about future healthcare costs. And it’s an account that may prove to be more flexible than you’d expect.
Why everyone with HSA access should participate
What makes a health savings account (HSA) unique is its combination of tax benefits and flexibility in using your funds.
HSAs combine the benefits of traditional and Roth retirement plans for the ultimate tax reprieve. Contributions to HSAs are tax-free, and invested funds in an HSA get to grow tax-free. Withdrawals are also tax-free, provided they’re used for qualifying medical expenses.
But what makes HSAs equally valuable is that you can use your money whenever you want, and on almost anything you want after a certain age.
HSA funds don’t have an expiration date, so while you can take withdrawals during your working years to cover near-term medical expenses, a better bet is to reserve your HSA for retirement. And the reason is twofold.
First, you may have an easier time covering healthcare costs while you’re working and collecting a paycheck than once you’re retired. And you may find that your costs are lower during your working years when you’re younger than during retirement when age-related issues might arise.
Also, HSA balances get to grow on a tax-free basis, similar to Roth IRAs. So the longer you let your balance grow, the more benefit you get, and the more wealth in that account you stand to accumulate.
Now just as the IRS imposes penalties for early IRA and 401(k) withdrawals, so too does it penalize HSA participants who withdraw funds for non-medical reasons. In that case, you’re typically looking at a 20% penalty, double the 10% penalty that applies to early IRA and 401(k) withdrawals.
However, once you turn 65, the penalty for non-medical HSA withdrawals is waived. At that point, you can tap your HSA for any purpose whatsoever. You can even use your HSA to pay for Medicare premiums.
Non-medical HSA withdrawals will count as taxable income, though. Only withdrawals for qualifying medical expenses get to enjoy tax-free treatment.
But this means that once you turn 65, your HSA can double as a traditional retirement savings plan. So if you end up with a large sum of money in that account, you can rest assured that it won’t have to go to waste, even if your healthcare needs end up costing a lot less money than expected.
Are you eligible for an HSA?
It’s not a given that you’ll be able to participate in an HSA. To contribute, your health insurance plan needs to conform to certain guidelines that change annually.
In 2025, your health insurance plan needs to have a minimum $1,650 deductible for self-only coverage, or a minimum $3,300 deductible for family coverage, to be HSA-compatible. Your plan’s out-of-pocket maximum also can’t exceed $8,300 for self-only coverage or $16,600 for family coverage.
You should also know that once you’re enrolled in Medicare, you’re no longer allowed to contribute money to an HSA, even if you’re still working. But rest assured that you can still use your HSA funds as a Medicare enrollee.
If your health insurance plan meets these requirements, you’re able to contribute up to $4,300 in 2025 if you have self-only coverage, or up to $8,550 with family coverage. There’s also a $1,000 catch-up contribution available for workers 55 and older.
Plus, some employers that offer HSAs contribute funds to these accounts on workers’ behalf. But even if your workplace doesn’t have an HSA, you can open one independently as long as your health insurance plan meets the requirements.
There’s really no other savings vehicle that offers the same tax breaks as an HSA. So it pays to not only contribute to one if you’re able, but make a point to reserve those funds for retirement. You may find that having an HSA balance to tap alleviates a good amount of financial stress later in life, no matter what healthcare expenses you end up facing.
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