How an HSA can enhance your retirement nest egg

You likely already know that saving money through a workplace retirement plan is can be one of the best investments you can make in your future. But it’s not the only way to pad your nest egg. Depending on how you choose to use the funds, Health Savings Accounts (HSAs) can provide an additional source of funds to be used towards health care costs now and into retirement. 

And they’re growing in popularity. As of early 2022, 33 million health savings accounts held over $100 billion in the United States, according to Devenir Research¹.

Find out more about how your retirement accounts and an HSA can work in tandem.

What is an HSA? 

An HSA is a type of savings account specifically for people who have a high deductible health plan (HDHP). To qualify as an HDHP for 2022, your health plan must have a deductible of at least $1,400 for an individual or $2,800 for a family, as per the IRS (increasing to $1,500 and $3,000, respectively, in 2023).

A health savings account (HSA) can be used to pay qualified medical expenses today, tomorrow and throughout your retirement years as long as funds are in the account. It's funded with pre-tax dollars — but it’s not a “use-it-or-lose-it” account. Your balance carries over each year, and can be invested once it reaches a certain threshold. The funds in your HSA can be used into retirement to help you pay for medical costs that Medicare may not cover like dental, vision and hearing.

In 2022, individuals can contribute up to $3,650 to an HSA account per year, and families can contribute up to $7,300. For people 55 or older, you can contribute an additional $1,000 catch-up contribution. 

How to save in your retirement fund and HSA at the same time 

You might be thinking that if you’re already contributing to a workplace retirement plan that an HSA isn’t necessary. But that would mean missing out on potential short- and long-term benefits. Here are some strategies to consider for how to use an HSA to complement your retirement investments:

Contribute at least the employer match for both. According to SHRM’s 2022 Employee Benefits Survey,² 57% of employers offered HSA plans, and nearly two-thirds (63%) provide employer contributions to these plans. Similar to how a 401(k) match works, employers may agree to match HSA contributions up to a set amount, such as $1,000. So that would mean that you would want to contribute $1,000, and with the match, you'll have a total contribution of $2,000 to your HSA.

Invest your HSA account. You have the option to not use your HSA and simply allow the funds to grow as you contribute, or once you reach a certain threshold, you can invest that money. If you're planning on saving your HSA funds for the long-term, investing is a wise move. Just as with your other retirement accounts, the power of compound interest and exponential growth can help your contributions grow over time. The longer you have before you retire, the more opportunity for growth you’ll have. As with any investment, there are risks and you could lose money; make sure to fully explore those risks before choosing to invest.  

Only use HSA funds now if you need to. If you have enough disposable income after maxing out your workplace retirement plan and your HSA to cover out-of-pocket medical costs, then you may wish to hang onto your HSA funds as long as you can. They are yours to use as long as they are in your account, even if you leave the employer or change plans (unlike Flexible Spending Account funds that are “use or lose” each year). Considering that a 2022 survey by the Kaiser Family Foundation³ found that 22% of adults ages 65 and over currently owe money due to medical or dental bills, these funds can prove to be very useful.

Tax advantages

Both workplace retirement plans and HSAs can help lower your taxable income each year since your contributions are made with pre-tax dollars. For example, if you make $100,000 and contribute $10,000 to your retirement plan and $5,000 to an HSA, your taxable income would be $85,000.

However, that's where the tax treatment similarities end. Traditional retirement accounts have tax-deferred growth, meaning you pay taxes on your earnings when you make withdrawals. With HSAs, you get tax-free growth and tax-free withdrawals as long as the funds are used for qualified medical expenses. And after age 65 you’ll be able to make withdrawals for non-medical expenses; the only difference is they’ll be taxed as ordinary income, just like withdrawals from a 401(k) or IRA.

If you can build up a nest egg in your HSA to deal with health care costs in retirement, and then use your other retirement funds for other living expenses, you'll be adding a tax-friendly tool to your arsenal — and providing yourself with another potential layer of financial security. 

Next steps:

• Calculate how much you may need to reach your retirement goals, using Voya’s myOrangeMoney® online experience
• Calculate how much you need to save to potentially reach your HSA goals using the Health Savings Account calculator