How to Combine an HSA with Other Retirement Accounts

A Health Savings Account (HSA) can be a valuable tool for managing healthcare costs and boosting retirement savings. It offers tax advantages that can complement other retirement accounts, like an IRA or a 401(k). Combining an HSA with these accounts can help you maximize your savings potential and reduce your overall tax burden. Here’s how to make the most of your HSA while planning for retirement.

What Is an HSA?

An HSA is a savings account for people with high-deductible health plans (HDHPs). Contributions to an HSA are tax-deductible, reducing your annual taxable income. Funds in the HSA can be used tax-free for qualified medical expenses, and unlike some other healthcare accounts, the money rolls over year after year.

HSAs also offer flexibility. You own the account, so the funds remain yours if you change jobs or retire. There’s no requirement to spend the money within a specific time frame. After you turn 65, you can withdraw money that can be used for non-medical expenses without facing a penalty.  (Those withdrawals will be taxed like ordinary income.)

How Does an HSA Work with Retirement Planning?

An HSA can be used alongside other retirement accounts, such as an IRA or a 401(k), to maximize savings. Here are a few strategies for combining them effectively.

Rolling Over IRA Funds into an HSA

The IRS authorizes you to do a one-time rollover from your IRA into your HSA. This increases your HSA’s balance without requiring additional out-of-pocket contributions. This is what is commonly referred to as a qualified HSA funding distribution. It’s important to note that the amount you roll over counts toward your HSA contribution limit for the year. In 2024, that limit is $4,150 for individuals and $8,300 for families.

To avoid penalties, you must stay enrolled in a high-deductible health plan (HDHP) for 12 months after making the rollover. If you lose eligibility before the 12-month period ends, you must pay income tax on the amount transferred, plus a 10% penalty. This process can be an excellent way to transfer funds from an IRA, especially if you anticipate high medical expenses in retirement and want to take advantage of tax-free withdrawals for qualified healthcare costs.

Maximizing Tax Benefits

An HSA is rare because it offers tax-free contributions, tax-free growth, and tax-free withdrawals for medical expenses. These benefits make it an effective complement to traditional retirement accounts like IRAs or 401(k)s, which are typically taxed when withdrawals are made. Contributing to an HSA and an IRA or 401(k) can lower your taxable income in the short term and save for healthcare and general retirement needs.

For example, if you have a 401(k) or IRA, the funds you withdraw in retirement are subject to taxes. However, withdrawals from your HSA for qualified medical expenses remain tax-free, even in retirement. This means you can cover healthcare costs without reducing your taxable retirement income.

Rolling Over 401(k) Funds

While you cannot directly roll over a 401(k) into an HSA, there is a workaround. You can roll over your 401(k) into a traditional IRA and then make the one-time IRA-to-HSA transfer. This can help you shift funds from a taxable account into a tax-advantaged HSA for future healthcare needs. (This will still count toward your annual HSA contribution limit.)

People may do this when they get closer to retirement and want to ensure they have enough saved for healthcare expenses, which can be a significant cost during retirement. Moving funds from a 401(k) or IRA into an HSA allows you to take advantage of the tax benefits that HSAs offer.

Other Important Considerations

Consider contribution limits and IRS rules when combining HSAs with other retirement accounts. For example, any IRA-to-HSA rollover counts toward your HSA contribution limit for that year, so it’s important to plan accordingly. You must also maintain eligibility for the HSA by staying enrolled in an HDHP for at least 12 months after the rollover to avoid penalties.

While HSAs offer many tax advantages, balancing your contributions between an HSA and other retirement accounts like an IRA or 401(k) is important. HSAs are best used for future healthcare costs, whereas IRAs and 401(k)s are more flexible for general retirement expenses. Having a mix of accounts can help you optimize your savings for healthcare and living expenses in retirement.

Let’s Build Your Wealth Together 

You can create a more comprehensive retirement strategy by combining an HSA with other retirement accounts. To explore the best options for your situation, schedule a consultation with Worth Advisors today.

Disclaimer: Always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation to sell or purchase any securities. Any rates of return are historical or hypothetical in nature and are not a guarantee of future returns, which may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions and security positions, which, when sold, may be worth less or more than their original cost.