Can I Still Contribute to My HSA After Retirement?

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As long as you retire before the age of 65, you can still contribute to your HSA post-retirement. However, as soon as you hit the age of 65, you are no longer allowed to contribute to your HSA.

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The simple answer is: Yes! As long as you retire before the age of 65.

Once you turn 65, you must stop contributing to your health savings account (HSA). Your HSA eligibility isn’t determined by employment (you can contribute to an HSA regardless of whether you have an employer-sponsored health plan or not), but is instead dependent on the type of health insurance plan under which you’re covered as well as your age. These facts, combined with the tax-advantaged structure of HSAs makes them an ideal tool to save for retirement.

Let’s take a look at the specifics.

The Basic Rules that Govern Health Savings Accounts

  1. You must simultaneously be enrolled in a High Deductible Health Plan (HDHP) to contribute to an HSA. The IRS sets the amounts of what is considered a HDHP annually. In 2020 and 2021, your annual deductible must be at least $1,400 for individual coverages and $2,800 for family coverage. In 2020, your out-of-pocket maximum cannot be more than $6,900 for individual coverage and $13,800 for family. This increases a bit in 2021 to $7,000 for individual coverage and $14,000 for family. If you’re unsure if you’re enrolled in an HDHP, ask your health insurance administrator.
  2. You must be under the age of 65.
  3. Your contributions are tax-free with respect to federal and most state taxes (as of 2019, if you live in California and New Jersey, your HSA contributions are subject to state tax).
  4. Your contribution limits for 2020 are as follows: $3,550 for individuals and $7,100 for families. In 2021, you can contribute up to $3,600 for individuals and $7,200 for families. If you’re 55 or over, you can contribute an additional $1,000 annually. These amounts are subject to change - however, the IRS usually announces contribution limits annually.
  5. You can invest your contributions to HSAs just like you would a 401k, Roth, or other retirement accounts.
  6. Your unused contributions and earnings roll over from year to year, compounding on themselves. They do not go away if you don’t use them.
  7. HSA distributions used for qualified medical expenses are always tax-free.
  8. Under the age of 65, if you use your HSA distributions, but not for qualified medical expenses, you will have to pay a 20% penalty to the IRS as well as income taxes on the distributed amount.
  9. Over the age of 65, you can use your HSA money on anything you want. But there’s a catch: if your distribution includes earnings from your contributions (e.g. interest, dividends or capital gains), you will have to pay income tax on those earnings if you use the money to pay for something other than qualified medical expenses.
  10. If you retire before the age of 65, you can continue to contribute to your HSA provided you maintain the other eligibility requirements. Even if you had an employer-sponsored HDHP and HSA account, you can work with your HSA administrator to continue contributing to said account. If it’s too cumbersome of a process, the IRS allows you to rollover your HSA funds to another HSA once every 12 months. This gives you the option to choose the HSA administrator of your choice.

Why You Should Consider an HSA as a Retirement Tool

Benefits of an HSA After the Age of 65

The short answer: it can save you money in the long run.

If you use your HSA like a traditional retirement account to pay for living expenses, travel and the like, you will pay income taxes on the earnings portion of your distribution. Conversely, you will pay income taxes on your entire distribution from your 401k or IRA. If you have a Roth IRA, you won’t pay taxes on the distributions since you already paid income taxes on the contributions.

However, if you use your HSA money to pay for qualified medical expenses, you won’t pay any income taxes on the distributions regardless of whether or not they include earnings. This matters because the average 65-year old couple who retired in 2019 can expect to spend $285,000 on healthcare in retirement (this excludes long-term care). If you were to use your HSA contributions and earnings to pay for these expenses, you would need to withdraw $285,000 from your account. But if you fall into the 12% tax bracket (the most common), you would need to withdraw $319,200 from your IRA or 401k to pay for the same expenses. That’s a savings of $34,200!

Another great benefit of an HSA is that you get to decide how much you want to take out and when. Conversely, the IRS requires you to start taking what’s called a “required minimum distribution” (RMD) from tax-advantaged retirement accounts starting at age 72.

As you can see, HSAs are a great tool to save for retirement, regardless of when you retire or what you want to use your money on. But it’s an even better tool if you’re planning to use your contributions and earnings to pay for medical expenses. To find out more about opening an HSA account, contact your health insurance administrator, Lively or check out more of our resources here.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.