August 4, 2020

Edited 12/30/20

Why You Need to Spend Your HSA Money Wisely

Know the smart strategies to spending your HSA money in your retirement.

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If you have a health savings account, you’ll need a few smart strategies for spending those funds during your retirement years. With the right approach, you can make the most of this highly efficient savings vehicle when your medical bills start increasing. Here’s why you need to spend your HSA money wisely.

HSA Tax Advantages

There are three tax advantages you can get from an HSA. 

  1. You (and even your employer) can contribute to your HSA on a pre-tax or tax-deductible basis.
  2. Your savings grow tax-free over time. 
  3. You can make tax-free withdrawals to pay for qualified medical expenses. 

With these triple tax advantages, an HSA is an excellent way to save for retirement. In most cases, using an HSA to save for your medical expenses in retirement is a better strategy than using a 401(k) or IRA.

You can keep contributing to your HSA until you reach age 65, even when you are not working. Unlike a flexible spending account, your HSA account is your money forever, and it’s portable, meaning you carry it with you, no matter where you work or where you live.

Important Things to Know About HSA

In order to contribute money to your HSA, you must have a high-deductible health plan. If you no longer have a high-deductible health plan, you can’t add more money, but you can still spend what you have set aside tax-free on qualifying purchases.

Maybe you had a medical expense that you forgot to submit to your HSA last year. No problem. You can submit receipts for any medical expenses that you have accumulated since the day you opened your HSA. Therefore, you should keep any medical expense receipts until after you get a reimbursement.

Prioritize Medical Spending

Because withdrawals for qualified medical expenses are not taxable, you should use your HSA only for medical expenses whenever possible. 

For example, you should use your HSA to pay for:

  • Copayments for doctor visits
  • Health insurance deductibles
  • Prescription drugs (consider using the app Hippo to save money)
  • Over-the-counter medications 
  • Medicare premiums
  • Hospital bills
  • Physical therapy
  • X-rays and MRIs 
  • Vaccines
  • Laboratory fees 
  • Psychological counseling 
  • Chiropractic services
  • Acupuncture

Lower Your Prescription Costs

Get the lowest price on prescription drugs so you don’t have to overpay with your HSA benefits and can continue to let it grow tax-free.

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You also can use your HSA for these items:

  • Eye exams and eyeglasses (for example, from Felix Gray or Warby Parker)
  • Dental expenses
  • Hearing aids
  • Wheelchairs and walkers
  • Smoking cessation programs
  • Home modifications like ramps, grab bars, and handrails
  • A portion of your premiums for long-term care insurance
  • Walkers, crutches, and canes 
  • Wheelchairs

Prescription Glasses Delivered to Your Door

Use your HSA benefits to get designer prescription glasses delivered to your door at affordable prices.


Massage therapy, nicotine patches, nicotine gum, gym membership dues, and special equipment can be considered a qualified medical expense if you have a letter from your doctor, stating that it’s medically necessary.

Using HSAs for Non-Qualified Expenses

What does not qualify for reimbursement from your HSA? Vitamins, dietary supplements, elective cosmetic procedures, food, and CPR classes are on the non-qualified list. 

If you use your HSA funds for a nonmedical purpose, you’ll have to pay income taxes on it. If you are under age 65, you also have to pay a 20 percent penalty on withdrawals for nonmedical purposes. However, after you hit age 65, you won’t owe the 20 percent penalty. 

Using HSA assets for nonmedical purposes is less detrimental to your finances after you enter retirement because you are probably in a lower tax bracket if you have stopped working or reduced your hours.

Remember that it’s very likely that you will have much higher health care expenses and long-term care expenses as you get older. Therefore, it’s better that you’ve accumulated enough in your HSA account and to limit spending on non-qualified items. 

If you are lucky enough to not spend a lot on medical and long-term care expenses in retirement, you can pass your HSA money along to your heirs after you die.

Perks From Credit Cards: Double Your Reward

Typically, your HSA provider will give you a debit card, but you are not required to use it. Instead, you can pay for your health care expenses with a personal credit card that gives you cash back points, airline miles or other perks. Investigate your options so you understand these benefits fully. 

It works like this: You pay for your medical bill with your personal credit card, so you can meet the minimum spending within the right time frame to earn the rewards. Then, you pay off your credit card and request a reimbursement from your HSA account. Remember to keep all your receipts, just in case the IRS decides to audit you. 

You Should Wait to Use Your HSA

Unlike a 401(k) or IRA, an HSA does not require you to start withdrawing funds after you reach a certain age. That’s appealing for anyone who wants to see their investment grow over time.

By waiting as long as possible to spend your HSA funds, you can maximize your potential investment returns and give yourself as much money as possible to work with in retirement. You should consider market fluctuations when using the HSA, the same way you would when taking distributions from any other investment account. 

However, hoarding your HSA funds, instead of taking care of your health needs, is always a bad idea.

Name a Beneficiary to Your HSA

If you name your spouse as your HSA beneficiary, the account will become your spouse’s own HSA after you die. Your spouse can maintain the HSA in his or her own name and easily access the funds. Distributions for qualified medical expenses will be income tax-free for your spouse.

However, there’s a downside to naming a non-spouse beneficiary for your HSA. For non-spouses, the account value will be taxable to the non-spouse beneficiary in the year of your death. For example, if you named your child as the beneficiary, this could be a significant tax hit for your child. 

When it comes to your HSA, it’s best to contribute to your HSA before you’re 65 and if you’re over 65, try to spend it on medical expenses. Your HSA can be extremely helpful where it’ll continue to grow tax-free as you get older. Here’s the bottom line: max out your contributions every year and only spend it when necessary.