The Secret Retirement Account: HSA (Health Savings Account)

The IRS has a secret.
There is a retirement account that is even more tax efficient than an IRA.

What?! Why don’t I know about it?

Well, that’s the thing. You probably already do. This account is often overlooked because it is not advertised as actually being a retirement account. The IRS says it is meant to be used for something else entirely: medical expenses.

The Health Savings Account (HSA)

The HSA is primarily meant to be used to supplement medical costs for people in a high deductible health plan (HDHP). You specify how much money you want to contribute annually, and your taxable income is reduced by that amount, just like contributions to a 401k. Not a bad deal, right?

It gets even better. Unlike its cousin, the Flexible Spending Account (FSA), the HSA does not have a “use it or lose it” rule, so each year’s contributions carry over to the next. And, it stays with you even if you leave your employer. The money you or your employer put in is yours to keep.

And it doesn’t stop there! There are even options for investing. That’s right. Compound interest: a FIRE-seekers best friend. Like other tax-advantaged accounts, all investment gains in an HSA are not taxed, so the money compounds faster than it would in a taxable brokerage account.

Tax deductions and tax free gains – Sounds pretty similar to an IRA or a 401k, doesn’t it?

So why isn’t the HSA a celebrated part of the retirement portfolio?

It’s named a Health Saving Account for a reason. Until you reach age 65, all withdrawals from the HSA have to be used to pay for medical expenses.

And that’s what most people use it for: doctor visit copays, insurance deductibles, and eye exams. That basically makes it an FSA. You contribute all you expect to spend for that year, and then you withdraw it when you need it. Boring.

Is there a better way to use the money in an HSA?

Yes, there is!

The medical IRA

An HSA can be treated like a “medical IRA.” The thinking is that everyone will have higher medical expenses later in life, so it is best to save and invest for it now. Instead of using it to cover your current medical expenses while you have a reliable income, set aside some of your savings for future medical expenses when you are retired.

Fidelity reports that the average 65-year-old couple retiring in 2017 will need $275,000 just for medical expenses in retirement. THAT’S $137,500 PER PERSON JUST FOR MEDICAL EXPENSES. (This is clearly something that you should be planning for.)

If we take that $137,500 figure as gospel, how much would a 25-year-old need to contribute annually if they started their working career today and planned to work a typical period of 40 years? About $600 (assuming 7% real returns). Definitely doable.

However, as efficient as an HSA is, an early retiree will probably want to put in as much as possible to reduce income tax liability. The IRS (in its infinite wisdom) has allowed an individual to contribute up to $3,400 annually to an HSA, which if invested can get you to that $137,500 a LOT quicker: within 18 years.

Let’s say that the 25-year-old worker (Anna) has a change of heart and decides to retire early at age 45. Anna contributes the maximum (2017) annual contribution of $3,400 for her entire 20 year career, and then stops contributions. At that point in her life, Anna probably still would not have high medical expenses, so she doesn’t need to tap into the HSA yet. Instead, she leaves it alone and lets it continue growing.


As you can see, it is possible that the modest early retiree can accumulate more money in an HSA than one would need for medical expenses*.

This is definitely an efficient tool for building wealth, but what is the point if you can only use it for medical expenses that you don’t need? Why build up wealth if you can’t even use it?

There are actually techniques to access the money for non-medical expenses, which brings me to the main purpose of this post: How should an aspiring early retiree use an HSA to their advantage?

Maximize HSA contributions

Just like with a 401k or IRA, making the maximum contribution to your HSA ($3,400 for individual, $6,750 for family) is a great way to reduce your tax liability. Why? Because all contributions are tax deductible. Your taxable income is reduced by the amount you contribute, which is a great deal.

Invest in your HSA

Did you know that you could invest the money in your HSA? It’s okay if you didn’t. According to a recent survey, 49% of account holders were not aware that they could invest the money in their HSA, me included. I had my HSA for two years before I figured it out!

If you are already on the path to FI, you probably already appreciate the benefit of investing in low cost index funds. If not, take a look at the graph above. Odds are that your HSA provides you with access to investment options, but if you are limited to high fee funds, or none at all, I recommend discussing it with your employer’s HR department. Here is a screenshot of some of the mutual funds in my HSA.

Woohooooo Vanguard funds!

You probably won’t be hurting for the money between now and retirement, so why not put that cash to work building up your net worth?

Use your HSA like a traditional IRA

After age 65, your HSA can be used to fund any expense, effectively making it a traditional IRA (tax-wise). Even then, medical expenses are still tax deductible.

I think this is one of the most important points to understand. You are not forever limited to only using your HSA for medical expenses. Even if you firmly believe that you will be healthy forever and that you will never need to make withdrawals from you HSA, the fact that you can make withdrawals for any expense after age 65 is a pretty good argument for maxing out your contributions now.

The Mad Fientist’s Approach: Save Your Receipts

receipts-1372961_960_720One popular FIRE-themed technique for accessing HSA funds is to save receipts for every medical related expense incurred during your wealth accumulation years. During this time you are paying for every non-insurance covered expense out of pocket, instead of drawing from your HSA. When you are in early retirement, you can then reimburse yourself for those expenses retroactively and use that money for normal, non-medical expenses. The Mad Fientist talks more about this here.

The advantage to this is that your money stays in the HSA for a long period of time, thus maximizing the potential for capital gains, and it gives you a lot of flexibility for how you use the money in early retirement.

To me, this seems like nickel-and-diming your way to early retirement. I am not going to go to the trouble to save the receipt from every doctor visit just so I can withdraw that $100 in 20 years.

However, I can see some expenses being high enough to make it worthwhile. I would be more inclined to keep track of receipts for 20 years for expenses related to a broken leg than for a bottle of contact lens solution.


Before you can even consider using an HSA, you should first asses whether enrolling in a HDHP is the right decision for your situation. Different people have different medical needs and situations, so an HDHP might not be the best (or even cheapest) option available to you.

If you do decide to enroll in an HDHP, you can sign up for an HSA if you meet the following requirements (source):

  • You are covered under a high deductible health plan (minimum deductible = $1,300).
  • You have no other health coverage (your spouse can still have a non-HDHP as long as you aren’t covered by it).
  • You aren’t enrolled in Medicare.
  • You aren’t claimed as a dependent on someone else’s tax return.

If you do decide to go with an HDHP, I would certainly recommend also enrolling in an HSA. If your employer does not offer one (or the investment options are sub-par), you can set one up on your own. (Bogleheads has a brief overview of some of the low cost administrators available.) The only downside to this is that because you are making non-payroll contributions, you don’t get the FICA deductions, which allow you to reduce your taxable income by about 7%.

Do you have an HSA? How do you plan on using the funds? Let me know in the comments!

*This is for illustrative purposes only. Average medical expenses may be significantly higher in 40 years, so please consider your individual situation and do your own analysis.

10 thoughts on “The Secret Retirement Account: HSA (Health Savings Account)

  • September 6, 2017 at 4:15 pm

    Great advice! You’re picking up on what the Mad Fientist put down a few years back. We max out our HSA and luckily, have access to Vanguard Admiral funds – VTSAX – to keep the investment balance churning.

    • September 6, 2017 at 6:28 pm

      Haha, yeah…can you tell I’m a MF fan? You scored getting VTSAX! I have to approximate it using 3 other funds, but I’m happy with that.

  • September 6, 2017 at 5:15 pm

    I love the HSA hack! We were under a great insurance with Mr. AR’s old employer (super low cost to us), but it was not a HDHP so we couldn’t have an HSA. Now, with my employer’s insurance, we have an HSA and it is exciting to have another investment account!

    • September 6, 2017 at 6:38 pm

      I know what you mean! It feels good to throw money in it every couple of weeks.

      One thing I find interesting is the choice of going with an HDHP or PPO. I wonder how frequently it is worthwhile to choose HDHP just so you can get an HSA.

  • September 13, 2017 at 4:02 pm

    I now have an HSA available to me at my new employer, so I’ve decided to start maxing it out starting this year. They also provide $500 for getting a physical and blood work done, which I was going to do anyways. Once I hit the $3000 minimum required to invest, I plan on moving it all into an index fund!
    Debt Hater recently posted…Net Worth Update – August 2017My Profile

    • September 14, 2017 at 12:00 pm

      Awesome! That’s great that your company contributes. However, the maximum amount applies to both employee and employer contributions, so you might need to revise your personal contribution amount to avoid overpayment. Have fun investing, and thanks for commenting!

  • October 24, 2017 at 7:49 pm

    So much good clarification on HSAs! Healthcare plans always seem a little hazy to me so I really appreciate your insights. I’m not sure if my employer offers an HSA, but I will definitely be looking into it! I think we have FSAs available instead.

    Great stuff! Thanks for sharing!

    • October 26, 2017 at 1:32 pm

      Glad to help, Jamie! The HSA is definitely more valuable than FSA, so hopefully you have an HSA available to you.

  • October 25, 2017 at 8:28 am

    Totally agree that HSAs are great and super psyched that I got to start using one this year. I just finished maxing it out and invested everything I could in a vanguard fund. My account requires that $1000 be kept in checking, so I put the rest ($2400) into the investment.

    One thing I’d suggest is rethinking your hesitance on keeping the receipts. I totally get your point about the hassle of it for small purchases, but think about the benefits of being able to pull that money out when you’re early retired. Each of those dollars spent on prior medical expenses will come out tax free and (I think) not count as income. That means more room for things like roth conversion ladders and tax gain harvesting. To me, it seems worth it even for small expenses. Plus, it isn’t too difficult to just scan/photo your receipts and keep a simple spreadsheet going to track everything. I’d suggest at least tracking them for now and then you’ll have the option to withdraw the money later or not, as you please.

    • October 26, 2017 at 1:35 pm

      Mine is the same way – have to always have $1000 in cash. You make a good point about the receipts. I’ll consider it! Thanks for commenting 🙂


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