Invest Retirement

This Account Can Help Women Save Their Retirement

Dayana Yochim  |  November 8, 2021

An HSA is designed to cut healthcare costs. But it can also be a retirement savings safety net. Here's how the HSA-retirement investing connection works.

Subtract $150,000 from the amount you’ve saved for retirement. That’s a pretty big financial hit, right? That’s how much a recently-retired 65-year-old woman should expect to spend on out-of-pocket health-related expenses going forward.

Now, imagine you have a 20% to 25% off coupon you can use when you pay those bills. This coupon could theoretically slash $40,000 from your expected retirement health tab.

That’s what a Health Savings Account (HSA) provides. It allows you to put aside tax-free money to pay for current and future healthcare costs. But it’s also more than that in ways that are particularly valuable for women, because:

  • Women spend $15,000 more than men on out-of-pocket healthcare costs in retirement, according to Fidelity Investment’s annual Retiree Health Care Cost Estimate.
  • The tax breaks offered by HSAs help women bridge the retirement savings gap by augmenting how much we’re allowed to save and shield from taxes. 
  • When taking a time out from the workforce (which women often do to raise children or care for family), you may still be eligible to contribute to an HSA. 
  • If you need to supplement the income you draw from your traditional retirement savings accounts, after age 65 you can use HSA dollars for non-healthcare related expenses without paying a penalty, though you still have to pay income taxes.  


A Health Savings Account (HSA) is a special savings account you set up at a bank or brokerage. You don’t pay taxes on the money you contribute to the account, and you don’t pay taxes on the money you withdraw when you use it to pay for healthcare expenses.

Eligibility to contribute to an HSA is based on the type of healthcare coverage you have. (You must be enrolled in a high-deductible health insurance plan.)

Unlike a Flexible Spending Account (FSA), there’s no deadline to spend the money in your HSA. You’re also allowed to invest the money like you do in a 401(k) so your balance can grow — perhaps significantly — over time. After age 65, an HSA can act as an auxiliary IRA where you can withdraw money for anything and only pay income taxes if it’s not for a qualified medical expense.

>> MORE: 5 HSA Rules to Know

How to use an HSA to augment your retirement plan

By some estimates women need to save 1.5 times as much as men to be adequately prepared for the future. (Please pass the smelling salts.) 

Because we live longer and earn less than men over the course of our lives, it’s important to both save more when we can, but also to prevent the retirement investments we amass from being depleted by high-dollar medical expenses. Here’s how an HSA can help.

Build a medical care cash cushion 

Just like you have a 529 to save for a child’s education, an HSA allows you to earmark money to pay for healthcare. A Flexible Spending Account (FSA) does the same thing, but has a more near-term focus. 

The differences start with how much the IRS allows you to save each year: 

For 2021, annual FSA contributions for individuals are capped at $2,750, versus $3,600 for an HSA. For families, FSA contributions are limited to $5,500 versus $7,200 for an HSA. If you’re 55 or older you can make an additional $1,000 catch-up contribution in an HSA. FSAs have no catch-up provision.

The HSA catch-up contribution alone is incredibly valuable as you start inching toward retirement. Between the ages of 55 and 65, you could pad your HSA with an extra $10,000 to $20,000. 

Another big difference between FSAs and HSAs: You can build your HSA balance over time. 

Treat it as a long-term, tax-free investment account

Many HSAs allow account holders to invest the money in the account, just as you would in a 401(k) or an IRA — but better, tax-wise. Your contributions are pre-tax (giving you an immediate income tax break), the money isn’t taxed while it’s in the account, and withdrawals are tax-free if used for qualified medical expenses. 

For example, if you invest just $1,000 of your HSA balance and earn a 7% average annual return, in 30 years you’ll have $7,612, according to Fidelity. And since qualified withdrawals are completely tax-free, you won’t pay a dime to the IRS when you use the money to pay for your bionic hip replacement. 

Since HSAs have no “use-by” date: You can leave the money in the account for decades and let compound interest work its magic. And unlike 401(k)s and traditional IRAs, you don’t have to take required minimum distributions (RMDs) when you turn 70 ½. 

>> RELATED: 6 Types of IRAs Every Woman Needs to Know About

HM Heads Up: Any money you want on hand for near-term medical expenses should not be invested in the stock market. Consider carving out a portion of your HSA contributions to invest, and putting the rest into conservative investments so it’s not subject to the short-term whims of the stock market.

Get reimbursed for past expenses

Want to let the money in your HSA accumulate for a while? Worried about spending the balance before you really need the money? As long as you still have proof of payment, you can put in your receipts for reimbursements for past medical expenses at any time — even something you paid out-of-pocket years ago. It’s almost like having a tax-free retirement ATM. 

This feature can really come in handy if you’re short on cash (maybe your income has declined) or the market is down and you want to let your investment accounts recover instead of cashing out. 

Tap the account to cut other pre- and post-retirement costs 

Although many expenses go down in retirement, some new ones take their place. If you’re on a limited income, an HSA can help you cover these additional costs. You’re allowed to use an HSA to pay: 

  • Medicare premiums for Part B and Part D prescription drug coverage
  • A portion of long-term care premiums (based on your age)
  • COBRA premiums 
  • Private health insurance premiums while you’re receiving unemployment

Use it as an additional income stream

Another handy feature of the HSA is that you don’t have to use the money for medical costs. There are, of course, some consequences to breaking the “rules”: You will lose some of the tax-free perks and may have to pay a 20% penalty if you’re under age 65. 

However, once you turn 65 you can use your HSA for non-medical expenses without having to pay the 20% penalty for nonqualified withdrawals. You’ll still be taxed, but it’ll be just like withdrawing money from a traditional IRA or 401(k) where you’re taxed at your ordinary income tax rate at the time of the withdrawal.

The bottom line

As healthcare costs continue to rise, protecting the rest of your wealth becomes even more critical. For medical care, you want your first line of financial defense to be your HSA and not the money in your IRAs and 401(k)s. 

Having a pool of money earmarked for medical expenses can spare your other accounts from taking an unnecessary hit, and help your retirement savings last longer. 

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