Offset Rising Medical Expenses in Retirement with a Health Savings Account 

If you worry about the impact of rising health care and medical expenses, it’s understandable. In 2022, medical expenses cost Americans $13,493 per person on average.¹ And in 2023, a retiring 65-year-old going on Medicare was expected to pay a total of $157,500 on average in health care costs through the rest of their life.²  

It’s become easier to incorporate the increasing expenses of health care into financial and retirement plans since a growing number of employers are offering health savings accounts (HSAs) along with high-deductible health plans (HDHPs). HSAs offer a practical way to set aside money for future medical expenses while also providing generous tax advantages that allow for long-term, tax-free growth of the assets.  

Future retirees are realizing the significant benefits of contributing to HSAs, similar to contributing to 401(k) accounts or individual retirement accounts (IRAs). This is evident by the 500% surge in HSA assets from 2013 to 2023, and roughly $116 billion in the U.S. spread across 36 million HSAs.³

With HSA contribution limits increasing in 2025, it’s worth considering taking advantage of an account, if you’re eligible, or boosting your contributions to the maximum when your open enrollment period comes up. Think of the HSA as another benefit offered by your employer for retirement preparation, along with your 401(k). 

Explanation of HSAs 

An HSA is a tax-advantaged savings account designed to pay for health care and medical expenses. Only people enrolled in HDHPs are eligible for HSAs. In 2024, a qualifying HDHP has an annual deductible not less than $1,600 for individual coverage or $3,200 for family coverage (going up to $1,650 and $3,300 for 2025).⁴   

Some HSAs provide the ability to invest contributions in mutual funds, ETFs, or similar types of investments. Like 401(k) accounts and IRAs, compounding can help HSA invested funds grow more over the years. This makes an HSA a strategic and attractive tool in retirement planning. 

Annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) can’t exceed $8,050 for individual coverage or $16,100 for family coverage (moving up to $8,300 and $16,600, respectively, for 2025). Qualified expenses include visits to a doctor or dentist, prescription drugs, eyeglasses, medical equipment and supplies, and medical services such as home care. Physical therapy, quit-smoking programs, psychological counseling, hearing aids, and many common over-the-counter medicines are also covered. The IRS provides detailed information on qualified HSA expenses in Publication 502. 

Tax advantages of HSAs

Unlike flexible spending accounts, HSAs do not have a yearly “use it or lose it” provision; you can carry the balance from one year to the next. Because the funds grow tax-free each year, HSAs can be particularly useful for paying for large or unexpected expenses — an incentive for building on the assets before retirement.

HSAs are portable, like IRAs, which means that you can usually conduct a direct HSA rollover from one provider to another. With an “indirect” rollover, you get a check from your existing HSA provider and have 60 days to deposit the check with your new provider or the distribution could be subject to income taxes and a 20% penalty.

If you still have money in an HSA after you turn 65-years old, you can spend the money for any purpose without penalty. However, if it’s not spent on qualified expenses, you’ll be taxed at your current income tax rate.⁴

Contributions to HSAs

If you’re covered by a qualifying HDHP, then you and your employer combined can contribute up to $4,150 in 2024 for an individual and up to $8,300 for a family. Catch-up contributions of an additional $1,000 are allowable for those who turn 55 or older by the end of the tax year. In 2025, the contribution amounts increase to $4,300 for an individual and $8,550 for a family. The catch-up contribution amount remains the same in 2025. The contribution limits are adjusted each year based on inflation rates.

Workers aged 18-26 who are on a parent’s HDHP can open their own HSA. However, their parents cannot pay for their child’s medical expenses from their own HSA; the payments must come from the child’s account.

Another benefit of HSAs is that you can supplement the employer’s contribution with your own income to reach the maximum contribution limit. Typically, you can use the same account that your employer set up for its deposits. With a single HSA provider, the employer should be able to monitor the maximum annual contribution to ensure that you don’t exceed the limit. Plus, by using payroll deductions, you can avoid Social Security and Medicare taxes on those deferred wages.

When reviewing your benefit options during open enrollment, consider increasing your contributions to the maximum if you have an HSA. If you still haven’t hit the contribution limit after the year is over, the IRS gives you until April 15 of the following year to make contributions directly from your bank account.

Maximization tips for HSAs

Unlike many other tax-advantaged accounts, you can take a qualifying distribution from an HSA at any time after a health care expense was incurred, if it was after the HSA was established. Instead of withdrawing funds during the current year, you can allow the HSA to continue its tax-free growth. At some point in the future, take a tax-free distribution to cover past expenses (as long as they were incurred after establishment of the HSA). This generous rule is subject to revision at any time, so it’s best to consult with your tax professional before using this strategy.

Given an HSA’s multiple tax advantages, maximizing your contributions every year and investing for the long term is a better strategy for managing health care costs than relying on retirement accounts funds. Even if you have an emergency savings fund in place and are contributing enough to a retirement account to receive an employer match, think about making the maximum contribution to an HSA if you’re eligible.

If you’re not sure whether to contribute to an HSA or how much, or you want to know more about how an HSA could fit into your retirement plan, we can help. Not a client of Mercer Advisors? Let’s talk.

1. “Trends in health care spending,” American Medical Association, April 25, 2024.

2. “Fidelity® Releases 2023 Retiree Health Care Cost Estimate,” Fidelity, June 21, 2023.

3. “Health Savings Accounts,” Consumer Financial Protection Bureau, May 1, 2024.

4. “How HSAs Work, Contribution Rules,” Investopedia, Jan. 5, 2024.

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