Health savings accounts (HSA) are a means for an individual with a qualifying high deductible health plan(1) to save for both current and future health expenses. Unlike any other savings vehicle, they are largely appealing for the triple tax benefit that they offer: contributions are tax-deductible, the interest and/or earnings grow tax free, and account owners may make tax-free withdrawals for qualified medical expenses (2).

Not to be confused with health care flexible spending accounts that only allow you a maximum year-to-year carryover of $500, HSAs not only allow you to carry over your balance from year-to-year, but they can also be transportable from employer to employer. Accounts are held with a trustee or custodian, which may be a bank, credit union, insurance company or brokerage firm, that typically offer mutual funds as investment vehicles.

Retirement Account in Disguise

An HSA can be ideal for individuals that don’t typically have annual high out-of-pocket health care expenses. For those individuals, it is recommended to consider enrolling in an HSA-eligible, high-deductible health plan (when available), and contribute on an annual basis the maximum amount (3) allowed.

Ideally, the goal would be to use the account strategically and allow it to accumulate and grow tax-free over the years rather than spending it down on routine annual health expenses. By doing so will allow your HSA to act as a “Roth-like” retirement account that can be used to make tax-free withdrawals to pay for the potentially high cost of medical expenses in retirement. Alternatively, in the event you are fortunate to be healthy in retirement, once you turn age 65, you can take penalty-free distributions for non-health expenses from your HSA but those withdrawals would be taxed at your marginal tax rate.

Fund HSA with an IRA

Often challenging is having the funds available to make the annual HSA contribution.  After funding a 401(k), and other expenses, finding available funds can be difficult. One word of caution is not to be over zealous to fund your HSA despite other goals such as having an adequate emergency funds and maximizing contributions to other retirement accounts.

There is a little known IRS statute that allows individuals who qualify to make an HSA contribution to make a one-time (lifetime) rollover from an IRA (4) to an HSA. The distribution must be less than or equal to your maximum annual HSA contribution.

Rolling money from an IRA into an HSA turns tax-deferred dollars into tax-free withdrawals for medical bills. But in general, it is better to fund your HSA with new funds, rather than rolling retirement assets. For one, you’ll maximize the tax breaks if you contribute new money to the HSA. In addition, it is not always recommended to raid your retirement account for other expenses besides retirement.  One exception to this thought would be if you have large, unexpected medical expense come up and do not have the funds to cover it. In this event, rolling money from your IRA into your HSA would make sense. Also consider an IRA-HSA rollover if as you near retirement age and have a properly funded retirement, it may make sense to consider an IRA-HSA rollover to quickly fund your HSA to cover potential future health care cost tax-free. If the situation is right, a qualifying HSA funding distribution is an excellent way to fund an HSA when other funds are not available to make a regular HSA contribution.  Be careful to follow the rules if you use this strategy. You must be covered by a high-deductible health plan to make such a transfer. The money also needs to move directly from trustee to trustee.

It is best to consult with a qualified financial or tax professional prior to considering any of the above strategies.

Pay Now and Reimburse Later

As you incur unreimbursed, out-of-pocket medical expenses throughout the years, it is important to hold onto those receipts. For those of you that are good record keepers, the IRS will allow you to reimburse yourself penalty and tax free with distributions from your HSA years later. That later time can be 30 or 40 years in the future where your HSA money has grown tax free. One note of caution on the record keeping side: ensure that you keep good records to demonstrate that the medical expense was never reimbursed and that you did not deduct as a medical expense on your taxes.


— Michael Smith, MS, CFP®, AWMA®, CRPC®


(1) Minimum Deductible Amount: Single $1,350/ Family $2,700; Maximum Out of Pocket: Single $6,650/ Family $13,300.
(2) The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision.
(3) HSA Statutory Contribution Maximum Single $3,450, Family $6,900; Catch-up contributions (age 55 or older) $1,000.
(4) This does not include active SEP or SIMPLE IRAs.