The Future: Your Health Savings Account Could Help
Fund It

For those who wish to retire early, HSAs can help cover health care expenses before becoming eligible for Medicare.

Many people use their Health Savings Account (HSA) to pay for medical expenses as they arise. But there are potential benefits in determining when to use it.

“An HSA provides a unique combination of tax benefits not available with any other account,” said Mary Ellen Hancock, a senior wealth strategist with PNC Wealth Management and Certified Financial Planner.

Through careful planning, you can create a pool of money to help manage health care expenses in your retirement years while using other funds to pay for current expenses.

Like 401(k) retirement plans and individual retirement accounts (IRAs), money in HSAs can be allocated to investment options. There are no federal taxes on the money you contribute through payroll deductions or on any investment earnings while the money is in the account. Unlike 401(k) plans and IRAs, there are no taxes on qualified withdrawals. 

Funding Medical Expenses in Retirement

Medical costs can be a major roadblock for many who wish to retire before becoming eligible for Medicare coverage at age 65. Although you can't generally use your HSA money to pay for health insurance premiums other than Medicare, you can use HSA money for deductibles, co-pays and prescription drug costs associated with the health insurance plan you do obtain.

Once you become eligible for Medicare, you can use your HSA to pay premiums, deductibles, co-pays and medical expenses not covered by Medicare, such as hearing aids and most dental care. In some cases, maintenance and personal care services -- such as assistance with disabilities – also can be covered if they meet stringent qualifications.

The tax-free withdrawal feature of HSAs can be a particularly important income source in retirement. If you use IRAs and 401(k) plan accounts to pay for large expenses, such as medical costs, there may be financial implications beyond paying taxes on the withdrawal. These withdrawals are considered taxable income, which can lead to higher Medicare premiums, more Social Security benefit taxes and a higher tax bracket.

“If you incurred qualified health care expenses in prior years, you may reimburse yourself for these from your HSA, as long as the expenses were incurred when your HSA was established and you kept the receipts,” said Hancock. “Since you already paid for these expenses out-of-pocket in prior years and did not request reimbursement from your HSA until later, you may use the reimbursement you receive for other expenses, such as home repairs, a vacation or a new car.”

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Managing Withdrawals

Two important considerations when making a withdrawal are the balance in the HSA and marital status.

“How you manage HSA withdrawals evolves over your lifetime,” said Hancock.

Upon death, HSA accounts pass to the living spouse and retain all tax features. However, when HSAs pass to non-spousal beneficiaries, the balance becomes taxable income to the beneficiary for the year of the HSA owner’s death.

In certain circumstances, it may make sense for a single person to reduce the balance of the HSA. For example, if there are qualified medical expenses in the year of your death, the HSA may be used to pay for those expenses before going to your non-spouse beneficiary.

On the other hand, if you are in a lower income tax bracket than your non-spouse beneficiary, you may consider naming your estate as the beneficiary of your HSA. The HSA’s value will then be included in your final tax return and will be taxed at your lower income tax rate instead of the non-spouse beneficiary’s higher income tax rate.

Learn More about HSAs »


Mary Ellen Hancock
Mary Ellen Hancock says an HSA provides a unique combination of tax benefits not available with
any other account

Balancing When to Withdraw

Knowing when to use HSA money instead of other resources requires a well-planned, evolving strategy.


  • Your marital status
  • The balance in the account
  • Your tax rate versus a non-spouse beneficiary’s tax rate
  • The impact of unplanned expenses during retirement.

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