How to Use Your HSA as a Retirement Booster in 2025

An HSA is a savings and investing vehicle designed to help you sock money for future health care expenses. NMK-Studio/Shutterstock

The costs of health care can be painful for many Americans—and it could get worse.

In 2025, medical costs are expected to reach their highest levels in 13 years, according to research by PwC.

And the burden of health care expenses may lay heaviest on retirees.

A 65-year-old individual retiring today can expect to pay $165,000 on health care in retirement, according to research by Fidelity Investments. The study assumes the person is enrolled in traditional Medicare (parts A, B, and D). But the costs of various Medicare components are also expected to rise in 2025.

Still, there are ways to shore up money for health care expenses while boosting your retirement savings. One option to consider is a health savings account (HSA).

That’s because once you reach the age of 65, you can withdraw money from an HSA for anything penalty-free. And you can use your HSA funds to cover Medicare premiums tax-free.

So let’s dig deeper into HSAs.

What Is an HSA, and How Does It Work?

An HSA is a savings and investing vehicle designed to help you sock money for future health care expenses, while providing distinct tax breaks.

Your contributions to an HSA are tax-deductible and your savings grow tax-free as long as the funds are used on qualified health care expenses.

You can open an HSA if you pair it with a high-deductible health plan (HDHP). Your employer may offer an HSA option as a benefit. Or you can open one through most banks and brokerages.

Some HSAs function like investment vehicles. So you can invest your HSA contributions in securities such as stocks, exchange-traded funds (ETFs), and mutual funds. You can think of it as an individual retirement account (IRA) for your health care costs. In fact, an HSA could fit nicely into your overall retirement savings strategy.

You can use HSA withdrawals on qualified health expenses tax- and penalty-free anytime. But after you turn 65, you can withdraw money from the HSA for anything including supplementing your retirement spending penalty-free.

You’d still owe income tax on withdrawals not used for qualified health expenses.

Nonetheless, there are other benefits that retirees can get from HSAs.

Shielding Your Social Security Benefits

You can’t open or contribute to an HSA if you’ve applied for or are receiving Social Security benefits. That’s because enrolling in Social Security automatically enrolls you in Medicare when you turn 65, which disqualifies you from making HSA contributions. HSAs generally require you to have only a high-deductible health plan (HDHP) as your health insurance. However, you can still use your HSA funds to cover qualified medical expenses.

So if you’re hit with a large medical bill, you may wonder whether to withdraw from a retirement plan such as a traditional 401(k) and IRA or your HSA.

You may want to consider your HSA. That’s because qualified HSA withdrawals from your HSA are tax-free and won’t affect your provisional income.

But withdrawing funds from your traditional 401(k) or IRA would increase your provisional income.

Your provisional income determines what portion of your Social Security benefits is taxable.

For the 2024 tax year, up to 50 percent of your Social Security benefits are taxable if your provisional income or combined income is between $25,000 and $34,000 ($32,000–44,000 for joint filers).

Further, up to 85 percent of your Social Security benefits are taxable if your provisional income is above $34,000 ($44,000 for joint filers).

HSAs Can Pay for Medicare

Although you can no longer contribute to an HSA once you’ve enrolled in Medicare, you can still use your HSA funds to pay for Medicare premiums and copays tax-free.

Furthermore, Medicare is another reason you should consider paying large medical bills with your HSA rather than a traditional IRA or 401(k).

A large withdrawal from a traditional IRA or 401(k) is considered ordinary income and could put you into a higher tax bracket.

And high-earners pay more for Medicare because there are surcharges on premiums for Medicare parts B and D called income-related monthly adjustment amounts (IRMA).

HSA funds used on qualified medical expenses won’t affect your taxable income.

What to Know About Investing in Your HSA

Some providers offer HSAs that function like traditional savings accounts with a set interest rate.

However, some providers also allow you to invest your HSA money in securities such as stocks, bonds, ETFs, and mutual funds.

But because you may need your HSA money to cover ongoing medical costs, most financial experts recommend you keep at least two to three years’ worth of routine medical expenses in cash or generally safer investments within your HSA. The excess could be invested in growth-oriented assets like stocks and mutual funds.

Still, you should always consider diversifying your portfolio with an asset allocation or investment mix based on your risk tolerance. You can find online tools that could recommend asset allocations based on factors such as your risk tolerance and financials. Your HSA provider may offer these as well.

What Are the 2025 HSA Contribution Limits?

Each year, the IRS sets contribution limits for HSAs. Here’s how the HSA contribution limits for 2025 and 2024 break down.

• 2024 HSA contribution limits for single coverage: $4,150
• 2024 HSA contribution limits for family coverage: $8,300
• 2025 HSA contribution limits for single coverage: $4,300
• 2025 HSA contribution limits for family coverage: $8,550

Those aged 55 and older can make additional “catch-up” contributions of $1,000 to their HSAs in 2024 and 2025.

You usually have until the tax filing deadline (April 15, in most cases) to contribute to an HSA for the previous tax year and claim deductions. You document your contributions on IRS Form 8889 if you opened a self-directed HSA outside an employer.

Your total contributions for the tax year can also be found on Form 5498-SA, which your HSA administrator would send to you.

But unlike traditional IRAs and 401(k)s, HSAs don’t have required minimum distributions (RMD)s. So you can keep saving in your HSA and make qualified withdrawals as needed.

What’s Covered by My HSA?

When withdrawing money from your HSA for medical expenses while in retirement, it’s important to know what’s covered. You can withdraw money from your HSA tax- and penalty-free for qualified medical expenses. This may cover an array of services including the following.

• ambulance
• annual physical exams
• artificial limbs
• body scans
• chiropractor
• crutches
• hearing aids
• home care
• hospitals services
• Medicare premiums

Various dental and vision services may be covered as well.

But it’s important to know that the IRS can update the list of qualified medical expenses. You can check out the latest version of IRS Publication 502 to see what’s covered.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.