Why an HSA is the Ultimate Retirement Account

What’s better than a 401k? A IRA or ROTH IRA? It’s a little known secret called the Health Savings Account.

The Health Savings Account (HSA) is the ultimate retirement account, even though it isn’t technically a retirement account. With its triple-tax advantage, here’s why the HSA ranks as the best option for your retirement savings.

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What Is An HSA?

The HSA was created by former President George W. Bush as part of the Medicare Prescription Drug, Improvement, and Modernization Act in 2003 as a way for people to set aside pre-tax income to cover health care costs.

It’s available for people who have high-deductible health plans (HDHPs).

Since people on HDHPs have higher out-of-pocket costs (due to higher deductibles), the government wanted to help people out by allowing them to save their income pretax in order to pay for medical expenses.

Pile of blister pack medications
(Image from Pexels)

How Is An HSA Typically Used?

Imagine you’re on an HDHP plan with a $3,000 deductible.

If you went to a doctor for something that costs $4,000 for example, then you’d be responsible to pay the first $3,000 (your deductible amount) before your HDHP plan helps out with the remaining $1,000.

$3,000 of after-tax money is a lot!

If your income tax rate is 30%, you’d need to make $4,286 in pre-tax salary to net out to $3,000 after taxes.

That’s where the HSA softens the blow.

If you had put money in your HSA to pay for this medical expense, you’d need to make exactly $3,000 because of the tax savings:

HDHP Health PlanMedical Costs Owed30% Income TaxIncome Needed
Without HSA Contribution$3,000$1,286$4,286
With HSA Contribution$3,000$0 (pretax)$3,000
Three people looking at x-ray results
(Image from Pexels)

This is all great in itself, but what if you don’t have much medical expenses?

Would contributing to an HSA still make sense?

ABSOLUTELY YES – all because of the triple-tax advantage I mentioned before. An HSA is the best retirement account option you have at your disposal!

What Do You Mean By An HSA Having A Triple-Tax Advantage?

A Health Savings Account has three combined tax advantages that no other accounts have:

HSA triple tax advantage
(HSA Advantages Infographic)

Advantage #1 – HSA Contributions Are Tax Deductible (Pre-Tax)

This was described in the example we used above – any money you contribute into an HSA is not taxed at all.

You immediately save money by avoiding any taxes typically taken out at your income tax level.

There’s only a certain amount of money you can put into your HSA every year though and the amount changes every year based on adjustments the government makes.

Here are the contribution limits for the current year and next year:

HSA Contribution Limits20232024

Advantage #2 – HSA Earnings Grow Tax-Free

Your HSA is like a savings account that grows with interest.

The interest rates aren’t great, but after you put in $1,000 (this varies between each plan, contact your plan sponsor for details), you can invest the rest in stocks, bonds, and other funds to supercharge your growth.

Best of all, no matter how much stocks and bonds you buy and sell, there’s no capital gains to report. No taxes to be paid.

Everything you make in your account is not subject to taxes until you take money out.

It’s all tax-free, baby!

And unless you have a medical bill you need to use these funds for, you can just let your money keep growing through your investments.

Advantage #3 – HSA Funds Can Be Withdrawn For Medical Costs Tax-Free

Similar to other retirement accounts like a 401k or IRA, once you retire and decide to withdraw funds from your HSA, you’ll have to pay taxes on the withdrawn amount.

However, unlike other retirement accounts, an HSA can be used for medical expenses during retirement too.

The money used for medical expenses is never taxed:

HSA vs IRA, 401k, ROTH
(HSA Tax Infographic)


HSAs are similar to IRAs, but even better:

  • Pre-tax money is deposited each year into an HSA and can be easily withdrawn at any time with no penalty or taxes to pay for qualified medical expenses. Withdrawals can also be made for non-medical purposes, but will be taxed as normal income and are subject to a 10 percent penalty if done prior to age 65.
  • Any HSA funds not used each year remain in the account (no “use it or lose it” like the Flexible Spending Account), and earn interest tax-free to supplement medical expenses at any time in the future.
  • Like an IRA, the account belongs to you, not your employer. But unlike an IRA, your employer can contribute to your HSA.

Think of the HSA as a super-charged retirement account.

Not only does it have the benefits of both a traditional IRA and Roth IRA retirement account, but it comes with a benefit that neither IRA offers; using it during retirement for medical purposes tax-free.

HSA As Part Of Your Retirement Strategy

Traditional Retirement Saving Advice

If you spend enough time reading about personal finance, you’ll eventually comes across advice on how to prioritize your retirement strategy.

It goes something like this:

  1. Contribute enough to your 401k account to get the maximum matching contribution from your employer
  2. Fund your IRA or ROTH IRA to the maximum limit
  3. Fund your 401k account up to the maximum limit

Modern Retirement Saving Advice

I’d argue that based on all the benefits of a Health Savings Account, the modern advice should be:

  1. Contribute enough to your 401k account to get the maximum matching contribution from your employer
  2. Fund your HSA to the maximum annual limit
  3. Fund your IRA or ROTH IRA to the maximum annual limit
  4. Fund your 401k account up to the maximum annual limit

Contributing to get your company’s matching contribution should still be the first priority; it’s literally free money.

But after that, funding your HSA to the maximum limit should be your next goal before focusing on an IRA or maxing out your 401k.

The Bottom Line

A Health Savings Account is your secret weapon and should be one of your top retirement options.

No other accounts have all of the combined advantages that an HSA has:

  • 100% tax deductible contributions
  • Money withdrawn for medical purposes is never taxable
  • Tax deferred earnings (includes interest and investment earnings)
  • Tax free interest earnings if money is spend on health care costs

I know that not everyone has access to a high deductible health plan (HDHP) with an HSA attached to it.

For those that do, an HSA is one of the best non-traditional retirement options available.

About John Pham

John Pham is a personal finance expert, serial entrepreneur, and founder of The Money Ninja. He has also been fortunate enough to have appeared in the New York Times, Boston Globe, and U.S. News & World Report. John has a B.S. in Entrepreneurship and a Masters in Business Administration, both from the University of New Hampshire.

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5 months ago

Can you recommend which company to use to open one?

2 years ago

Worth noting that there is no time limit to when you withdraw medical expenses from your HSA meaning if you don’t need to use HSA funds right now on an existing medical expense you can hold onto the receipts. This allows you to keep your money invested into your HSA growing for you. After 10, 20, 30 years and you need some cash you can withdraw that medical expense from years ago. We’re doing this now with birth expenses, we’ll pay up front as we have the cash but save all the receipts in the event we ever need the money.

3 years ago

One thing to be mindful of with HSA accounts is that if you switch jobs, your HSA account with your previous employer will be subject to monthly fees that was covered by your previous employer. If you don’t want to incur those fees, you would need to transfer it to your new HSA account with your new employer but there is possibly a fee from both the old and new HSA accounts when doing so.

3 years ago
Reply to  Daniel

You can also transfer your HSA to a different custodian like Fidelity that doesn’t charge fees or charge commission to buy/sell investments. The only fee you would need to consider is the transfer out fee from the original account.